Bill Seeks to Extend Federal Tax Exemption for Forgiven Mortgage Debt
Earlier this month, the Homeowners Debt Relief Extension Act (H.R. 3856) was introduced on Capitol Hill. The bill, if passed would extend the mortgage debt tax exemption that's been in place since 2007 for another two years.
Under provisions of the Mortgage Debt Relief Act of 2007, debt that reduced or cancelled through a loan modification or debt forgiven through a foreclosure or short sale was treated as tax-exempt. Other criteria also apply, such as the indebtedness must be on a principal residence and the maximum amount that can be claimed for the tax break is $2 million.
Since 2007, Congress has extended this tax relief to homeowners so that they are not liable for taxes on the difference between the house's value and the loan modification or between the house's value and the amount of a foreclosure sale or short sale. This tax relief expired on December 31, 2013, however, and so far, no extension has been passed by lawmakers, though homeowner advocates, including the National Association of REALTORS®, are lobbying heavily to reinstate the mortgage debt tax exemption.
The bill would ensure any qualifying reduction or cancellation of mortgage debt is not considered taxable income by extending this tax relief through January 1, 2016, for debt forgiven after December 31, 2013.
The legislation calls for the costs of such an extension to be offset by repealing a tax break in the Internal Revenue Code's Section 199 for oil and gas companies. Foster says the Section 199 deductions are no longer necessary since oil and gas companies are making billions in profits each year.
"With millions of struggling homeowners still underwater on their mortgages, now is not the time to cut off this tax credit," the bill’s sponsor Rep. Bill Foster (D-Illinois) said. NAR believes there could be action in the U.S. Senate to extend this provision sometime this spring, however the House of Representatives has indicated it does not want to extend temporary tax provisions until it completes work on comprehensive tax reform.