Home > Uncategorized > Mortgage Tax Relief Has Expired

Mortgage Tax Relief Has Expired

Starting in January 2013, homeowners who lose their homes to foreclosure will have to pay federal taxes on any unpaid mortgage the bank can’t recoup through auctions. The same will hold true for people whose loan principal is reduced by mortgage modification. These wipe-out loans are now taxable income. When it comes to debt reduction, struggling homeowners are getting hit on the head twice; first, a blow by the poor housing market and second by a blow from the Internal Revenue Service is enough to knock anyone’s finances into unending ruin. In addition, the expiration of the Mortgage Forgiveness Debt Relief Act is likely to push more people to remain in their homes worth less than their mortgages and slow down the housing market’s recovery.

debt reliefRepublican Jim McDermott has introduced a bill geared toward extending the exemption. The extension would allow homeowners to write down their mortgages and refinance without having to face a large tax bill. Homeowners will be able to meet a lower monthly mortgage payment. If Congress doesn’t approve the bill, gains in the housing market will lose its momentum. White House economic advisers consider the poor housing market to be one of the greatest obstacles to economic recovery and debt reduction.

If a homeowner who owed $400,000 on a mortgage sold the home for $300,000 with the bank forgiving the extra $100,000, the IRS would consider the amount forgiven as income and tax it. As a result, homeowners could face thousands of due taxes. While extending the Mortgage Tax Relief makes common sense, the political turmoil around the fiscal-cliff negotiations may mean that common sense will not win out. Many Democrats feel it doesn’t make sense to expect someone who can’t even make a monthly mortgage payment to come up with $50,000 in taxes.

Right now, about 22 percent of residential mortgages are underwater. In hard numbers, that’s over 11 million homeowners who could be be hit with an additional tax if they were fortunate enough to get a mortgage modification or short sale from their bank. There are many in the wings waiting to see what Congress will do and hoping their debt reduction problems aren’t compounded with a nay.

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