Imagine two families.
One family has paid off their mortgage and owns their home outright. They sell their home for a $75,000 gain. The tax code – as it should – exempts this gain from income tax.
The other family is struggling to make ends meet and is at risk of losing their home. Due to the historic downturn in the housing market a few years ago, they are still “underwater” on their mortgage and owe $75,000 more to the bank than their house is worth. They do the right thing and work with the bank to get part of their mortgage forgiven.
Things are looking up for our family. It looks like they will be able to keep their home.
Then April 15 rolls around, and they get a huge tax bill from the IRS because that $75,000 in forgiven debt has been classified as “income.”
Then they lose their home.
That just isn’t right.
This unfair treatment could affect 2 million distressed borrowers. The very prospect of such a huge tax bill could be enough to turn many homeowners off from working with their bank to modify their mortgage. As a result, many of these families could lose their homes, setting back the housing recovery at a time when it is finally starting to gain momentum.
That’s why it’s critical for Congress to renew the Mortgage Forgiveness Tax Relief Act to help the millions of families across the country struggling to avoid foreclosure and stay in their homes.
First enacted in 2007, the law ensures that if a family works with their lender to get some of their mortgage debt forgiven, that amount is not counted as income. It is outrageous to hit a family with a tax bill for “income” that they never saw.
Since the law was passed, millions of homeowners have negotiated with their mortgage lenders to reduce their mortgage amounts. Other homeowners have put their homes on the market in “short sales,” where if the sale price is not enough to pay off the mortgage, the lender agrees to cancel the remaining balance. By giving troubled homeowners certainty that they won’t be taxed by the IRS for phantom income, the law has helped families stay in their homes while finding their financial footing and helped stabilize neighborhoods battered by foreclosures and vacancies. The law has helped more than 7 million families, according to the Urban Institute.
Congress extended the Mortgage Forgiveness Tax Relief Act in 2008 and again at the beginning of 2013. Unfortunately, the law expired at the end of last year, at a time when 6.4 million homeowners are still underwater on their mortgages.
We have introduced bipartisan legislation to extend the Mortgage Forgiveness Tax Relief for this year and next year. The legislation is supported by industry and consumer groups alike – from the National Association of Realtors and Mortgage Bankers Association, to more than 200 community-based groups and consumer organizations.
With many homeowners still struggling, and the recovery in housing markets still fragile, Congress should give homeowners certainty. The Great Recession started with the collapse of the housing markets, and we must do everything we can to keep our economy growing.
Extending this critical law must be a top priority. Families are making important financial decisions today and need to know now if there will be big tax consequences next year. Real estate agents and housing counselors are asking what advice they should give. Sadly, there is no clear answer right now.
Congress must act now to assure families that the IRS won’t hit them with an unfair tax bill next April 15 because they sell their home this year. Basic fairness for homeowners and the continued recovery of our housing markets demand it.
Stabenow is the junior senator from Michigan, serving since 2001. She is chairwoman of the Agriculture, Nutrition and Forestry Committee, and also sits on the Budget; the Energy and Natural Resources; and the Finance committees. Heller is the junior senator from Nevada, serving since 2011. He sits on the Commerce, Science and Transportation and the Enegy and Natural Resources committees.