The Mortgage Forgiveness Debt Relief Act continues to await an extension for 2014. The act, which exempts mortgage debt forgiven by a lender in a short sale or loan modification from taxation, was originally adopted in 2007 and expired on January 1.
Without an extension of the relief act, a homeowner who is released from any amount of debt must report the forgiven debt as taxable income. Under a short sale, the amount of debt forgiven is the difference between the accepted sale price and the current owner’s total debt.
“It’s a matter of fairness,” Jamie Gregory, the deputy chief lobbyist for the National Association of Realtors, told the New York Times. “If the lender is foregoing part of your debt, it’s not that you’re making a gain on it. If it’s a short sale, you’re trying to sell and move on.”
“The expiration of the tax break presents broader policy implications as well,” writes the Washington Post. “After being coaxed — and even forced — by the government to work with troubled borrowers, lenders may suddenly find that borrowers are in no position to accept their help.”
Using history as a guide, some observers believe lawmakers will refrain from making a decision until after this November’s elections are decided.
“We believe Congress is unlikely to complete work on the (extension) until late this year,” Guggenheim Securities analyst Jaret Seiberg wrote in a report on the bill, according to National Mortgage News. “It could come down to December.”
The good news is that, if the extension is granted, it will be retroactive to Jan 1 of this year regardless of when the bill is actually passed.
Even if the bill is not extended, a short sale may still be the best option for homeowners unable to keep up with their debts. Under the current system, foreclosure does not automatically cancel your debt to the lender. Should your lender choose to forego collection, taxes will apply as usual.
Status updates to H.R. 3856, Homeowners Debt Relief Extension Act of 2014, are available courtesy of the Library of Congress’ Thomas service. (Simply check “Bill Number” and Enter H.R.8356.) According to the site, the bill was last referred to the Ways & Means committee on Jan. 31.