In a bill that would be retroactive to January 1st, 2014 (when the benefit expired), the Senate has passed a two year extension of tax relief for home owners who have had mortgage debt forgiven by a lender. Debt is forgiven if a home is part of a short sale, loan modification or foreclosure and the payment received by the lender is less than the debt owed..
Typically debt forgiven has always been treated as income for tax purposes, but with the explosion of foreclosures after the end of the real estate bubble in 2008, Congress granted a temporary tax provision eliminating the tax which expired at the end of last year. The measure still has to make it through the House of Representatives.
The extension is needed because many homeowners are still underwater. NAR President Steve Brown says. “We applaud the Senate Finance Committee for approving a bipartisan compromise bill today This is, at its core, an issue that’s all about fairness. It is unfair to ask homeowners who are underwater on their mortgage and who make the prudent decision to do a short sale instead of allowing their mortgage to go into foreclosure to pay tax on the forgiven amount of the loan.”
The mortgage forgiveness tax relief act provided in the past has been one of Congress’ bipartisan success stories, and there’s a good chance an extension will pass the House of Representatives this year, too, analysts say.
Some 350,000 households could be affected by the tax if relief isn’t extended, because that’s the number of households who sold their house last year as a short sale. “And we expect a large number of short sales [an estimated 300,000 to 350,000] this year,” says Brown.