A bill that would extend a key tax break to tens of thousands of short sale sellers who sold their homes in 2014 for less than they owed on their mortgages passed the U.S. House on Wednesday and is headed to the Senate for consideration.
A one-year extension of the Mortgage Debt Forgiveness Act, which expired Dec. 31, 2013, was included in the Tax Increase Prevention Act of 2014 and passed the House on Wednesday on a 378-46 vote. Short sale advocates and real estate groups have been lobbying hard all year to help homeowners sold their home through a short sale avoid a devastating tax bill which they likely could not afford.
Traditionally, if a lender allows a homeowner to sell a property for less than the amount owed on the mortgage, the homeowner has to report that forgiven debt as taxable income to the Internal Revenue Service. The Mortgage Debt Forgiveness Act of 2007, which had been extended multiple times, allowed taxpayers to exclude that forgiven debt from their annual income calculations.
The tax break lapsed in 2013, forcing homeowners to either gamble that it would be revived and proceed with a short sale or remain in homes that they either couldn’t afford or couldn’t sell because the mortgages were underwater.
If the bill does not pass, all is not lost. According to some experts, there are other ways under the IRS Code for insolvency to exclude a short sale tax forgiveness from income. Consult a qualified tax attorney or CPA for guidance.
An analysis earlier this year by the Urban Institute concluded that uncertainty over whether the tax break would be renewed could affect up to 2 million seriously underwater borrowers, including some who would eventually fall into foreclosure.
I’ll be keeping tabs on this important issue.