On December 31, 2013 the Mortgage Cancellation Tax Relief will expire. Currently, homeowners who go through a foreclosure or short sale with part of the principal forgiven don’t have to pay income tax on the amount forgiven. After Jan. 1, however, the IRS will view any amount of forgiven principal as income – a “phantom income tax” – and tax it accordingly.
Congress could still, however, extend tax relief later in 2014 and make it retroactive to Jan. 1, a move the National Association of Realtors® (NAR) calls “likely,” though it’s not a sure thing.
“Homeowners shouldn’t be forced to pay tax on money they’ve already lost with cash they never received – and never will receive,” NAR says in a statement.
The U.S. Senate and House both have legislation to extend tax relief, but an extension is no longer possible in 2013 since the House of Representatives has adjourned for the year.
In the Senate, S. 1187, the “Mortgage Forgiveness Tax Relief Act,” was introduced in June. In the House, H.R. 2994, the “Mortgage Forgiveness Tax Relief Act of 2013,” was introduced in August.
Yesterday, the Senate discussed a tax relief extension. Following the discussion, Senate Majority Leader Harry Reid (D-NV) requested unanimous consent to bring up and pass a number of expiring tax provisions, including mortgage cancellation. But under Senate rules, the process stops with the objection of only one Senator, and one objected.
Reid then announced an intention to work with Republicans to pass a retroactive tax extenders bill – including mortgage cancellation and other tax relief measures – early in 2014. Senate Finance Committee Chairman Max Baucus also expressed his intention to move the bill, along with a limited number of other tax provisions, early in 2014.
While Congress won’t act before Dec. 31, Baucus and Reid’s actions indicate publically that Congress will most likely address individual tax provisions retroactively in 2014. According to NAR, many procedural obstacles must still be overcome, but it’s confident Congress will move on an extension of Mortgage Cancellation relief in 2014.
A vote by the House, though, is less certain. That chamber is considering a larger tax reform package, which can make passage of individual elements, such as mortgage tax relief, less certain.
Realtors should continue to tell their lawmakers about the issue’s importance and how it’s causing uncertainty in the market.
The issue is most pressing for clients involved in a distressed transaction, such as short sale. Realtors working with one of these clients should encourage them to speak with a tax professional for advice.
In addition to NAR, the attorney generals of 43 states have pushed Congress to extend mortgage tax relief. Florida Attorney General Pam Bondi and Attorney General Jepsen of Connecticut sponsored a letter, along with 41 other attorneys general from around the country, urging Congress to extend soon-to-be expired tax relief.
“In Florida, we are doing everything we can to assist distressed homeowners,” Bondi says. “Those who have benefited from certain relief, such as principal reduction and forgiveness under the National Mortgage Settlements, may face significant setbacks, including default and even foreclosure, if the current tax exemption on this relief is not extended.”
© 2013 Florida Realtors®
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