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:
Another entitlement from Obama. WAAAAAH I can't afford my house and now it is our problem ?
"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.
Wow, this completely sucks, reward the losers who are defaulting---
I love some of you people posting here. You are like the "Tea Party," To make a point you would take a highly successful program and torpedo it because it cost $3.00 a person? If you took this program or breaks away you would increase personal bankruptcy exponentially. You would push people already in financial trouble over the edge into homelessnes and lifetimes of government assistance. How much do you think that will cost you? In California, allowing for short sales has not only helped people and the banks it has helped raise the value of real estate by almost 20% where i live. That is about $50,000 on my personal residence. Where i live there is approximately 250,000 people. Many like me who have never had a shortsale or bankruptcy but sure like the fact that someday we may be able to sell our houses to pay for the old folks home.
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.
ABOUT SMART SPENDING
Editor Bev O'Shea lives and works in the foothills of the Appalachians. A former copy editor for The Atlanta Journal-Constitution and the Orlando Sentinel, she joined MSN Money in 2007. She's a fan of sunsets, college football and free shipping, among other things.
Having worked as a writer, reporter and editor for more than 25 years, Editor Julie Tilsner is the sort of person who can't help but correct grammar in Facebook postings and on billboards. She's written for BusinessWeek, the Los Angeles Times, Parenting, Redbook, AOL and others. She lives in Los Angeles County with her family and loves to drink wine and practice yoga, although not generally at the same time.
A writer for MSN Money since January 2007, Donna Freedman won regional and national prizes during an 18-year newspaper career and earned a college degree in midlife without taking out student loans. She also writes about smart money tactics for magazines and on her own site, Surviving and Thriving.
Mitch Lipka has been warning people about scams and shining light on questionable business practices for more than 20 years. Mitch, the consumer columnist for The Boston Globe, has also been a reporter and editor at The Philadelphia Inquirer, Consumer Reports, South Florida Sun-Sentinel and AOL. He won the 2010 New York Press Club award for best consumer reporting online and was honored in 2011 for his reporting on child product safety.
Marilyn Lewis is an award-winning writer with a passion for getting readers clear, straight information that helps them stay out of financial trouble. A former reporter for The San Jose Mercury News, she works from her home in Port Townsend, Wash. Contact her at MarilynLewis@Outlook.com.
LATEST BLOG POSTS
Children from lower income families are at greater risk of suffering accidental injuries and being sickened by food, according to a Consumer Federation of America study.