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What Mortgage Forgiveness Tax Relief Means to the Real Estate Recovery

As taxes are being weighed in Congress, tax relief on mortgage forgiveness is set to expire at the end of the year

According to the IRS, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be considered taxable income.

The Mortgage Debt Relief Act of 2007 was enacted to allow taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a short sale or a foreclosure, qualifies for the relief.  This Act is set to expire at the end of 2012.

As home prices spiraled downward and millions of homeowners became underwater on their mortgages (owing more than their homes were worth) during the housing crisis, this measure was needed so consumers who were already financially devastated could pick up the pieces and move on with their lives.  If this act is not extended, it means that anyone who is going through a loan modification, short sale or foreclosure in the future will face a potentially huge tax bill associated with the money they “lost” on their homes.

Despite some positive signs of recovery, our nation’s real estate market is still fragile.  Consider the following:

  • Transactions not completed by year-end could become taxable in 2013, despite a borrower’s reliance on this tax relief.
  • More than 20% of current homeowners with a mortgage owe more on their homes than the current fair market value but many homeowners are trying to hang on to their homes and pay their mortgages.  Any change in finances, marital status, employment or health can force them to sell as a short sale or be foreclosed upon.
  • Nationwide, over a quarter of all home sales still involve a distressed property. 

If Congress does not extend this tax relief, it will most certainly hurt the housing recovery.  Neither consumers nor the housing market need that added burden.  Homeowners shouldn’t be forced to pay a tax on money they’ve already lost with cash they never received. 

The housing market, while recovering, is still fragile enough that this tax relief is needed in 2013 and possibly beyond. 

The Scott Loper Team includes Scott & Lisa Loper at Keller Williams Real Estate, 601 Bethlehem Pike, Bldg. B, Ste. 100, Montgomeryville, PA 18936, (215) 631-1900, www.ScottLoperTeam.com.

Lisa Loper November 30, 2012 at 01:09 PM
Anthony - I agree with your comments except that this is a superficial issue. The federal government bears a lot of responsibility for the housing crisis. However, anyone facing having their wages garnished for the next 20 years by the IRS to payoff income tax owed after they were crushed by the housing downturn would not consider this superficial.
Anthony Wayne November 30, 2012 at 04:51 PM
The Feds have total responsibility for the crisis. The superficial discussion is that minor tweaks to the existing process will solve these problems moving forward. A solution is a rethink from the ground up. Anything less is superficial and promotes the status quo.
Joseph Finnick November 30, 2012 at 07:56 PM
I would vastly disagree that this is superficial and that too much government created this problem. If anything, the housing problem (along with the rest of what caused the 2008 recession) was actually the government being too silent while private companies wreaked havoc on our economy. Read any history of the financial crisis and you will see lenders engaging in predatory lending due to lack of regulation. You will see the lack of regulation in the grading of that debt for resale in the derivatives market that caused terrible investments to be seen as great ones. You will see companies that did not officially have a government guarantee on their loans openly state that they did while the government stayed quiet. Saying the Feds have total responsibility for this crisis because they were doing too much is absurd. One note where you could blame the Federal government is that they incentivized home ownership and making loans that people created a very lucrative business based around the number of mortgages given out instead of the quality of mortgages.
Anthony Wayne December 01, 2012 at 01:36 AM
It seems absurd to the uninformed perhaps. In fact, if true capitalism were allowed, markets find the price. Government intervention by manipulating markets create bubbles like you describe. The markets react to the bubble or intervention, and chaos ensues. Capitalism protects consumers, not business. The excessive risks taken by banks was underwritten by the Feds. Less government, thus regulation, is always best for the consumer. Try re reading your economics 101, and step away from the kool-aid bar for a while.
Joseph Finnick December 01, 2012 at 02:09 AM
The risks were underwritten by the Feds after the fact so that we did not fall into a depression. You need to really get into an econ class.

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