Mortgage Forgiveness Debt Relief Act

The Mortgage Debt Relief Act of 2007 allows qualified taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring and mortgage debt that is forgiven in connection with a short sale or foreclosure, generally qualifies for the relief.  For example, if you owe a debt to someone else and that person cancels or forgives that debt, the canceled amount of the debt may be taxable.  However, if the cancelled debt applied to your qualified principal residence, the indebtedness could be forgiven.  This Act was originally set to expire in 2008, however was extended through the end of 2012.  Only cancelled debt that was used to buy, build or improve your principal residence, or refinance debt incurred for those purposes qualifies under the Act.

With the end of the extension nearing, many homeowners are now wondering if the act will be extended again.  On February 15, 2012, it was announced that Obama’s Fiscal Year 2013 budget proposal includes an extension of the Mortgage Forgiveness Debt Relief Act of 2007 through the end of 2014.  An extension of the act would ensure that homeowners who received principal reductions from loan modifications or other forms of debt forgiveness through short sales or foreclosure on their primary residences would not have to pay taxes on the amount forgiven.  Under the act, up to $2 million in debt elimination can be tax-free.

Based on the importance of facilitating home mortgage modifications, in the Treasury’s Green Book, there is a summary explanation of the administration’s budget proposal and it calls for an extension of the tax break due to ‘the continued importance of facilitating home mortgage modifications.’  The proposal extends the act through 12/31/2014.  At the end of this time, the government would reassess the market to determine if another extension is needed.

While it all looks good on paper and can easily be seen as the right thing to do, what is the reality the law will be extended and what is it going to take to get it done?  There is a lot of opposition from the conservative members of Congress that could keep the act from being approved.  The price tag to extend this act is about $2.7 billion and they want to know ‘Who is going to pay for it?’

The extension is needed because people are still affected by the downturn of the housing market and the economy.  Many of the folks hit hard in 2007 and 2008 are still feeling the pains of the financial repercussions.  Homeowners today are still drastically affected as property values continue to decline and many people are either still out of work or working for wages considerably lower than they were prior to the fall of the economy.  While the market in Colorado Springs has picked up slightly and the inventory of homes on the market has been somewhat reduced, the increase in the number of short sales and foreclosures continue to rise.  People are being hit just as hard today as they were in 2007 and 2008.  It is unrealistic that any of the homeowners today seeking help through a loan modification, short sale or foreclosure are in a position to pay taxes on any amount of debt forgiven.  If they are not in a position to pay their mortgage, how can they pay the taxes on forgiven debt?

The National Association of Realtors (NAR) was a large supporter of the ACT when it was originally put into law in 2007.  They supported the first extension in 2008 and today they support the need for another extension!  When Linda Goold, the NAR’s director of tax policy, commented on the possibility the Act would not be renewed, she said, ‘There would be very, very serious economic repercussions if lenders and borrows remained uncertain about whether the law would be extended.  This uncertainty would create an environment of remarkable chaos.’

Now is the time for every homeowner and real estate agent to speak out and let Congress know that the extension of the Mortgage Forgiveness Debt Relief Act of 2007 is critical!  We must be the voice that ensures the extension gets passed into law.  This is definitely a budget proposal that requires attention and each American needs to speak out because it’s anticipated that getting this extension passed could be a tough fight and met with strong resistance.  The NAR is behind the extension and stresses that the public concern needs to be known. With so many of the nation’s homeowners hit hard financially, they need to step up and demand help and let their concerns be heard.  While Obama is certainly looking for brownie points as he nears the next election, we are dealing with a divided house that struggles to agree on the real issues at hand.  Therefore, it is important for each an every homeowner and real estate agent to take the necessary stand to get the law passed!