Tax hike spooks struggling homeowners
The housing industry and consumer advocates are preparing for a frantic eleventh-hour push to save struggling homeowners from a hefty tax bill next year.
{mosads}Congress has a light end-of-year workload compared to 2012, when lawmakers scrambled to avoid the “fiscal cliff.” But industry and advocates are joining forces to highlight one particular provision, warning that allowing it to expire could push more homeowners into foreclosure just as the housing market is recovering.
The provision in question exempts homeowners that have some portion of their mortgage forgiven, typically by a short sale, from having to pay taxes on that forgiven debt. Under normal tax law, such forgiven debt is taxed as income, but the Mortgage Forgiveness Debt Relief Act, enacted in 2007 as the subprime bubble was bursting, freed struggling homeowners from that hefty tax bill.
That measure was extended for one year as part of last year’s fiscal cliff deal, and now its backers are trying again to keep it alive.
Advocates of the legislation argue that the biggest challenge to getting another extension is not any political opposition, but rather getting attention on the issue, and finding the appropriate legislative vehicle.
An end-of-year tax “extenders” package is not a sure thing this year, as top taxwriters in the House and Senate are devoting their attention and energy toward crafting a comprehensive tax reform package.
They enjoy bipartisan support in that effort, as three different bills extending this provision have been introduced and are attracting cosponsors. But with just a few days left of Capitol work in 2013 and no major legislative projects in the works, the push is on to find another way to extend it.
“It would be totally unacceptable for Congress to let families who get help with their mortgages get hit with a tax bill they don’t deserve,” said Sen. Debbie Stabenow (D-Mich.), who has introduced one of the bills. “We’re going to continue doing everything we can to get this done before Congress goes home in December.”
To bolster their case, they point to the recent record settlement the government struck with JPMorgan to settle charges tied to the mortgage meltdown. Part of that $13 billion deal includes at least $1.5 billion in mortgage relief. Without another extension, homeowners receiving relief from their mortgage will be given a fresh burden from the IRS, backers warn.
If the bill expires, they argue that homeowners may actually prefer walking away from their house and going into foreclosure as opposed getting help and being on the hook with the federal government.
“The borrower’s obligation now doesn’t go away, they now have an obligation to the IRS…which could come with more enforcement risks to the borrower making foreclosure a safer choice,” said Dave Stevens, head of the Mortgage Bankers Association. “The IRS is definitely going to come after you for the unpaid bill.”
Jamie Gregory, deputy chief lobbyist for the National Association of Realtors (NAR), added that the mere danger of the provision not being extended is having an impact. He is hearing from lenders trying to strike a deal with struggling borrowers who are thinking more about just walking away.
“They’re afraid the provision won’t be extended, and they don’t have the money to pay a tax bill, so they’re just better off walking away,” he said.
NAR is preparing to send letters to every member highlighting the issue, and a host of consumer groups already did so. In their Nov. 22 letter, the consumer groups called the matter of “critical importance.” Failing to extend this provision would undermine the nation’s efforts to get the housing market back on track, they warned as they pushed to free the measure from broader tax legislation.
“An extension of the [bill] cannot wait for a more global tax reform bill; it should be enacted swiftly,” they wrote.
More than a dozen national consumer and left-leaning groups signed on to the letter, including the National Consumer Law Center, Americans for Financial Reform and the Center for American Progress.
Advocates would like to see the bill considered by both chambers on its own, but acknowledge that such an ask for the low-key bill is unlikely.
“That’s a difficult thing to do nowadays,” said Gregory. “There’s a lot of obstacles.”
Further complicating matters is the cost of a one-year extension — the 2013 extension was estimated to cost roughly $1.2 billion over 10 years, and Republicans may be unwilling to back a standalone bill that adds to the deficit. Stabenow’s bill, and another in the House, would extend the measure for two years.
Nonetheless, those hoping for an extension point to the broad support the measure has gotten, particularly from lawmakers representing states still recovering from the downturn. For example, a two-year extension proposed by Rep. Tom Reed (R-N.Y.) has 28 cosponsors — 16 Democrats and 12 Republicans.
Copyright 2023 Nexstar Media Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.