Homeowner tax break survives 'cliff' deal

Struggling homeowners won't be slammed with taxes when lenders forgive a portion of their debt.

By MSN Money Partner Jan 3, 2013 12:33PM

This post comes from Marilyn Lewis of MSN Money.


If you're in foreclosure or are underwater on your mortgage and hoping to sell your home, you can breathe again. Despite all it didn't get done in this week's fiscal cliff deal, Congress did keep alive an important program of tax relief for troubled homeowners in the late-hour legislation.


Struggling homeowners will continue to get tax relief on mortgage debt that's been forgiven.

Image: House for sale © Ocean, CorbisHow it works

The Mortgage Forgiveness Debt Relief Act of 2007 would have expired Monday had Congress not acted. Housing experts were worried the loss would worsen the country's economy.


MarketWatch explains how the act works:

"Without the break, forgiven debt can be treated as taxable income, and already struggling homeowners would face taxes from a short sale or loan modification. For example, an underwater homeowner in the 25% tax bracket could pay $12,500 in taxes for a short sale in which his house sold for $150,000, but he previously owed $200,000. With the tax break, the homeowner would not have to pay taxes on the $50,000 of forgiven debt."

Remember, though: The act applies only to a primary residence. "Debt that's forgiven on a second home or on a home equity line of credit that wasn't used to finance home improvements is supposed to be reported to the IRS as income," says The Wall Street Journal.


A $1.3 billion subsidy

That whistling sound you hear? It's the bullet dodged by a lot of Americans.


Here's who's sleeping better now:

  • The roughly 50,000 homeowners a month who lose homes to foreclosure.
  • Some 500,000 homeowners a year who get the OK from their bank for a short sale, meaning that the bank agrees to forgive the difference when a home is for less than is owed on the mortgage.
  • An estimated 1 million homeowners who may get some mortgage debt relief from the $25 billion settlement among five big lenders and 49 state attorneys general over "robo-signing" and other lender abuses.
  • Underwater homeowners whose lenders forgive some of their mortgage balance outside the government settlement.

Subsidizing debt forgiveness isn't cheap. Extending the act will cost $1.3 billion in 2013, says CNNMoney. Now it's set to expire Jan. 1, 2014.


Don't dismiss the act as a gift solely for debt-ridden homeowners. The chances are good that mortgage-forgiveness debt relief benefits us all in one way or another. CNNMoney reports:

"'Allowing the act to expire would harm these families and their communities and it would run counter to current loss mitigation efforts,' wrote Tim Pawlenty, president of the Financial Services Roundtable, Mike Calhoun, president of the Center for Responsible Lending, and John Dalton, president of the Housing Policy Counsel. in a letter to the Senate Finance Committee."

(Yes, that's Tim Pawlenty, the former Minnesota governor who briefly ran for the Republican presidential nomination last year.)


Extending the act "could help distressed home sales continue moving along," says the South Florida Business Journal


Also, if the tax incentive had disappeared, troubled homeowners would have reason to fight foreclosure longer, in turn prolonging the house recovery.


Could have dragged housing down

Defenders of the act worried that its death at this point could have set back recent housing market progress:

  • Sales of new homes are rising.
  • Real estate gained roughly $1.3 trillion in value in 2012, the first year-end gain since 2006, says Zillow.
  • Homebuilders are starting back to work again.

"If there ever was a no-brainer in housing policy, this would be it," Jaret Seiberg, a policy analyst for Guggenheim Securities, told CNNMoney before the congressional vote.


More from MSN Money:


Jan 3, 2013 8:24PM
I have faithfully paid my bills for years... even through lean financial periods. Where the hell is MY tax break for that?
Jan 3, 2013 2:12PM
So now I have to make up the taxes for these people that wouldn't take responsibility for their own decisions. Whatever happened to personal responsibility?
Jan 3, 2013 1:53PM
They should have to pay the full tax at some point just like all the responsible people do.
Jan 3, 2013 6:42PM
Most of these peopel are the 47% that romney was talking about....next they will want me to pay for their kids college, thier health insurance. Oh thats right I am doing that already....I am sorry i am in the 2% of income earners after working my tail off for over 35 years. Why should i bail out someone who doesn't know how much house they can afford....I didn't buy a house that was to expensive for my wife and i. we can pay for it with one salary alone. this is such BS that I want to loose my cookies....
The worst thing about all of this - is there isn't any accountability as to HOW you got underwater in the first place.  If you used your house as a 'piggy-bank' all these years - and are now upside down on your loan, no one cares...as opposed to those that (unfortunately) bought at the high end of the market...
Jan 4, 2013 2:23AM
Wow, wow, wow...apparently the majority of you idiots either didn't read or don't understand the article!! 50/50 there...its a toss up. However, blame the Tea Party, the Republicans, the banks? How stupid are you?? Oh yeah, just read your ignorant postings. How bout we BLAME ALL the idiots that mortgaged WAY MORE house than they knew they could ever afford!!!! Take some damn responsibility for your uninformed & uneducated home buying actions. Oh wait, I forgot...in this current age that is not allowed anymore--personal responsibility that is. For all you simpletons, this is strictly IRS tax policy. Not a result of a secret Tea Party backroom deal. Or a super sneeky Republican midnight bill. Hell, all the biggest banks in the world could not have even dreamed this kind of stunt up, let alone pull it off & get away with it!! If you want to lay "blame", I suggest you leave your moronic Democrat comfort zone, actually do some research, & discover it's the current Demagog Party (see Democrat Party) who is to "blame". This whole Real Estate f*** up is directly due to a few key Demagogs who lobbied for, threatened & pushed thru the horrible rules that FORCED banks & mortgage lenders to make loans to people who NEVER IN A MILLION YEARS could hope to afford the homes they were told they could. They forced these banks & mortgage lenders to "bypass" most lending requirements to make sure people got these home loans. Basically, if you had a pulse you got a mortgage! NO verification of income, employment, assets, debt ratio...etc. You want names---NY Senator Chuck Schumer, NV Senator Harry Reid, CA Senator Diana Feinstein to name three. Former president Clinton & former Attorney General Janet Reno are also included in causing this whole problem. AG Reno threatened these banks & mortgage lenders with criminal charges, prosecution, IRS audits & even being put out of business if they complained even once! I know this from personal knowledge. So, before anybody else posts some form of stupidity or ignorance, PLEASE, after reading this post, to your due diligence & learn the truth from the facts!! All the information is out waiting to be revealed...you simply have to look for it. The truth awaits your discovery.
Jan 4, 2013 12:24PM

Wow, this completely sucks, reward the losers who are defaulting---


Jan 4, 2013 12:58PM
So i work 2 jobs and barely pay the rent so i can pay taxes for others to keep their homes?  How friggen fair is that?  It might be time to just give up and go leech off of others until that runs dry.
Jan 3, 2013 7:15PM

Keep working zombies, you need to pay those taxes. Work some overtime.

Jan 4, 2013 2:45PM
And then everybody wonders why the country is broke. These people need a reason to NOT dump their houses, this should be the tax penalty.  I did not overbuy and I do not get a break.  This just encourages more greedy and bad behavior. Those of us who are responsible never get any breaks.
Jan 4, 2013 2:12PM

"Don't dismiss the act as a gift solely for debt-ridden homeowners. The chances are good that mortgage-forgiveness debt relief benefits us all in one way or another."


By that logic everyone's mortgage should be forgiven, think how much that would stimulate the economy.  No more pesky mortgage payments every month, you wouldn't have to fool with itemizing taxes to get the interest deduction, you could use the extra money and buy something else........why didn't someone come up with this years ago?!!


Oh yeah, it's called personal responsibility.  Something everyone involved in this "bailout" seems to have a hard time wrapping their head around.

Jan 4, 2013 1:18PM

When I lost my job 4 years ago we almost lost our house but refinanced so we could keep it.  Then about 6 months ago my boyfriend started having major medical problems.  To avoid the high medical bills he chose to go through a clinical trial that used FDA approved drugs.  But the medications make him sick all the time, very similar to someone going through cancer treatment, and he's had to miss some work.  And again we are in the process of refinancing our home so we don't loose it.  We love our property, but not the house, but it's ours and we aren't renting.  I have since started working and life is slowly getting better.  We got state help after I lost my job.  I went to college and because of that I now have a job in the accounting industry that can't go over seas, job security.  I know what it's like to be on both sides of the fence and I don't wish that on anyone.  It's hard in this economy, but it can be done.  I think where a lot of people fail is that they never take any classes or training on budgeting.  When my grandmother and even my parents where in high school they were taught how to budget and reconcile their bank accounts. When I was in high school I never learnt any of that.  I didn't learn any of that till I went to college and took accounting classes.  Now I use that training to keep our spending in order.  I know in the state of Washington you can go to any Work Source office and take a class on budgeting.  It's a life saver, even if you are only on state assistance.  It can be done and you can live a decent life if you budget. 

Jan 4, 2013 2:35PM
Lets reward the people who are a drain on society. Great Idea. America is doomed.
Jan 4, 2013 11:59AM
It is so odd what I wrote first and deleted. Although most of these people were fools, bordering on idiots, to sign up for the mortgages that they did, most all of them were set up to fail by our government AND the banking industry.
Jan 4, 2013 3:16PM

Another entitlement from Obama. WAAAAAH I can't afford my house and now it is our problem ?


Jan 3, 2013 6:43PM
To the writer of this article, cancellatino of debt that does not meet the criteria for exclusion under the Qualified Principal Residence Indebtness is not automatically taxable as you quoted the Wall Street Journal.  Another common exlusion is the "Insolvency Exclusion".  A cancelled debt on a 2nd home or rental for example can be excluded from taxable income if the taxpayer's liabilities exceed his assets at the time the loan is cancelled.  Most taxpayers that cannot make their loan payments are already insolvent or they would continue making payments on the loan.  Their is also a bankruptcy exclusin and Qualified Real Property Business Indebtedness exclusions as well.  It is misleading to inform the public that property other than a principal residence will cause them taxable income when there are other exclusions to assist them.
Jan 4, 2013 1:25PM
I feel sorry for the saps that bit off more than they could chew, no different than the person driving a fancy car that they can't afford. WAKE UP PEOPLE!!! I know a few people that did this and now are crying the blues I sympathize with them  then when I'm in the comfort of my home and drive my car that's paid for I think what a dum dum.
Jan 4, 2013 11:54AM
Notice how the story stated that 49 state Attorney Generals would be involved in the $25B settlement. That one A.G. is from the state of Nevada who was the only idiot that tried to outguess the final outcome and took $3M in settlement money from the banks before the case was done. That AG is Cathrine Cortez Masto and she's the number one idiot in the state of Nevada. She loves to close down business's in the state while running her rouge bunch of useless lawbreaking deputy AG group in Carson City. The money she agreed to was to be divided to around three thousand homeowners in Nevada. Nevada was the second worst state hit durring the housing implosion, so this is like a double wammy to Nevadan's. But hey, what do you expect from government whether it be federal or state? Way to go Masto!
Jan 4, 2013 12:25PM

Help the A-hole who default--


Jan 4, 2013 2:44PM
It is just stupid idiotic Washington crap that they can look at someone's loss of home value as income. I hate government! I don't have sympathy for most who bought more house than they could afford, but this is one of the most annoying ways government reaches into pockets really for no right reason. Certainly the people in these situations haven't "really" found themselves in a nice financial gain.
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