One of the most helpful laws on the books for underwater home owners is set to expire at the end of this year. At this point, The National Association of Realtors expects to make a strong push to get it extended because the law will likely be needed in the years ahead as lenders undertake more loan modifications for hard-hit home owners
The law is mortgage cancellation relief and it was first passed in 2007 with the National Association of Realtors taking a prominent role as industry supporter. It relieves home owners who get part of their mortgage loan forgiven from having to pay tax on the forgiven portion of the loan for single family primary residences.
Ordinarily, the IRS would count that forgiven loan amount as income. But in light of how hard home owners were hit in the market downturn, it was unrealistic to expect households to pay tax on tens of thousands of dollars on forgiven debt when they lack money to pay their mortgage without a modification.
Now, with the ink barely dry on the $25 billion foreclosure settlement between the U.S., states, and the country’s biggest banks, the likelihood of mortgage modifications picking up is strong.
It’s safe to say many members of Congress want to extend the relief. It has already been extended once, in 2009. And given its strong bipartisan support in both houses, many members can be expected to support extending it further, especially with its need poised to grow.
But in talking with NAR Director of Tax Policy Linda Goold about the issue, the challenge could be in finding a legislative vehicle that can make it through Congress. Goold says trillions of dollars in tax provisions are expiring at the end of this year. Bills for extending expiring tax provisions in the past have tended to be the last pieces of legislation Congress considers before the end of its session, leaving little room for alternative approaches.
What’s more, all of these expiring provisions tend to get considered as a big package. That means mortgage cancellation relief, as popular as it is, could get snagged if this larger tax package gets held up.