The 2007 measure that exempted borrowers from federal taxes they normally would owe on assistance received from banks has expired. This hits the tax break on short sales and forgiven home loan debt arrangements, and many experts are concerned about the impact this will have. In short, federal taxes are now due on any mortgage debt relief.
Taxes are not paid on borrowed money because of the obligation to repay it. But money borrowed that is then canceled as a result of a foreclosure or short sale counts as income. If the debt is forgiven, the lender is required to report the amount because there is no obligation to repay the money. An owner with a debt of $200,000 on a home that sells it for $125,000 has a $75,000 difference (gain) that would be considered taxable income is granted a short sale by their lender. Critics argue that it’s time to move on. Allowing the tax break means less revenue for the federal government.
A report by the Congressional Research Service calculates that a middle-income homeowner who is granted a $20,000 reduction in mortgage debt could expect to owe $5,600 in federal taxes without the tax break. ”It makes absolutely no sense,” says Sen. Debbie Stabenow, D-Mich. “This is not just about fairness for homeowners. This is about keeping the housing recovery alive.”
Other policymakers agree, given the broad bipartisan support for an extension of the law. While Congress went on holiday break without taking action, it could revisit the issue as soon as next week, possibly passing a retroactive extension. Short sales in Atlanta remain active and a loss of this tax break will have a significant impact on what distressed home owners do moving forward. Expectations are that this administration will reinstate this rather quickly…
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