Homeowner tax break survives 'cliff' deal
Struggling homeowners won't be slammed with taxes when lenders forgive a portion of their debt.
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.
How 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:
Wow, this completely sucks, reward the losers who are defaulting---
Keep working zombies, you need to pay those taxes. Work some overtime.
"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.
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.
Another entitlement from Obama. WAAAAAH I can't afford my house and now it is our problem ?
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