Editor’s note UPDATE: At the end of 2014, Congress passed a one-year extension of the Mortgage Forgiveness Debt Relief Act so that it applies to home sales that occurred through calendar year 2014. The law expires on December 31, 2015, unless it is extended again. More information from the IRS is available here.
Today Congress is faced with a serious decision that will ultimately determine the long-term stability of our housing market.
We must decide if we want to reauthorize the Mortgage Forgiveness Debt Relief Act and help the millions of struggling families desperately trying to make ends meet, or continue taxing people who are barely getting by as is.
Prior to the Recession of 2007, families who traditionally sold their homes for less than the balance of the mortgage – and were forgiven the difference by the bank – would have to pay income tax on the difference. When the housing market collapsed, it left millions owing substantially more on their mortgages than their homes were worth.
In an effort to address this, I introduced the Mortgage Forgiveness Debt Relief Act, which was signed into law by President George W. Bush. This legislation allowed taxpayers to exclude income from the discharge of debt on their principal residence from 2007 to 2013. Moreover people who reduced the debt on their mortgage through restructuring or foreclosure qualified for financial assistance.
Since 2008, more than 800,000 homeowners have taken advantage of this tax break. Unfortunately this Act was allowed to expire despite its broad popularity, leaving hundreds of thousands of families to decide whether a loan modification or a short sale is worth the potential tax penalty.
If Congress fails to reauthorize the Mortgage Forgiveness Debt Relief Act, there is a real possibility that homeowners who choose to short sell during 2014 will be required to pay income tax on money they have already lost at a time when they are least likely to have the means to do so.
This will put further strain on already financially-distressed borrowers and slow the still-fragile housing market’s recovery. In fact the expiration of the law is already affecting the housing market. According to new data, short sales have fallen from approximately 10 percent to 12 percent of home transactions in recent years to between 4 percent and 5 percent, with some short sellers opting to file for bankruptcy rather than taking a chance that the law will not be renewed.
It is not the first time we have had to address this issue. In 2009 and again in 2012, Congress was confronted with the Mortgage Forgiveness Debt Relief Act’s expiration. Despite all the brinksmanship and partisan politics, we overcame our inherent differences and reauthorized the Act until the end of 2013.
Given how much more polarized and fragmented Congress is now, I realize this task might not be as easy to accomplish. However, every day we fail to act, more and more distressed homeowners will choose to default until foreclosure or simply abandon their property rather than take advantage of opportunities for short sales. This in turn will destabilize communities and drive down values in surrounding neighborhoods.
Providing assistance to struggling homeowners is incredibly important. Towards that end, Congressman Tom Reed (R-NY) and I introduced H.R. 2994, the Mortgage Forgiveness Tax Relief Act, which would in effect extend the Mortgage Forgiveness Debt Relief Act through 2014. This bipartisan legislation has received favorable support from both parties and currently has 137 cosponsors.
In addition to encouraging the sale of unaffordable properties, families who already sold their homes or negotiated a lower payment will not be required to pay income tax on homes which they no longer own. In either case, this must-pass legislation will go a long way towards helping millions of financially distressed American families.
Even after the housing market collapse and the recession, families across our great Nation have not given up on the American Dream of owning their dream house. Homeownership is a symbol of responsibility and an essential part of achieving economic prosperity. It is important that Congress ensures confidence and security when the American people borrow money to finance their home.