WASHINGTON, D.C. – April 4, 2014 – (RealEstateRama) — U.S. Senator Debbie Stabenow, a senior member of the Senate Finance Committee, today praised Committee passage of her Mortgage Forgiveness Tax Relief Act, bipartisan legislation that protects underwater homeowners from being hit with huge, unfair tax bills by the IRS. Her provision, included in legislation to extend expiring tax provisions (the EXPIRE Act), ensures that homeowners who owe more on their mortgages than their homes are now worth would not be hit with additional income tax if a portion of their mortgage is forgiven as part of an agreement with their lender. Without Sen. Stabenow’s legislation, homeowners – for the first time since housing crisis began – would be required to pay taxes on this phantom income when they refinance or sell their homes in what are commonly called short sales.
“We should not be giving banks a tax break for the mortgage relief they offer to struggling homeowners and then send middle-class families a big tax bill,” said Stabenow. “I’m glad we were able to come together in a bipartisan way to protect millions of Americans, including hundreds of thousands of people in Michigan, from being hit with an unfair tax bill so large that it could cause them to lose their homes. This legislation is a top priority and it’s critical for Congress to act immediately and help the millions of families who just want a fair shot to do the right thing, get caught up on their payments, and stay in their homes.”
Stabenow’s amendment will extend the moratorium on taxing mortgage forgiveness through the end of 2015.
The historic collapse of housing markets from which we are still recovering has forced many families to sell their homes for less than they paid for them, and sometimes for less than their mortgage balance. Others may be stuck in mortgages that are tens of thousands of dollars or more larger than what their homes are now worth. Before Congress enacted Senator Stabenow’s legislation in 2007 in response to the housing crisis, the IRS taxed loan forgiveness provided to homeowners as income, meaning underwater families were hit with a tax bill on money the family never saw. These unfair tax bills could be substantial enough to cause families to lose their homes.
At the same time, permanent tax law allows banks that are required to provide relief to homeowners to write off the costs from their taxes.
Senator Stabenow championed the original legislation that protected homeowners from this tax on phantom income. However, that legislation expired at the end of 2012. Senators Stabenow and Dean Heller (R-NV) led a bipartisan group of senators in introducing legislation last year to continue this protection for homeowners through the end of 2015. Companion legislation in the House has wide bipartisan support but the Ways and Means Committee has not acted upon it.
According to the Urban Institute, the Mortgage Forgiveness Tax Relief Act has provided tax relief to more than 7 million families. With an estimated 6.4 million homeowners still underwater on their mortgages-including 250,000 Michigan families– it is critical that the law be extended to provide certainty to families, our housing markets, and our overall economy.
The legislation is supported by industry and consumer groups alike – from the National Association of Realtors and Mortgage Bankers Association, to more than 200 community-based groups and consumer organizations, like National Consumer Law Center. 42 of the nation’s attorneys general, Democrats and Republicans, have also joined in calling upon Congress to act quickly on this legislation.