U.S. Congress Set To Extend Relief For Mortgage Holders
More than 30 percent of federal income tax filers in Massachusetts claim the mortgage interest deduction. Many of these mortgage holders in Massachusetts could potentially benefit from the proposed Tax Increase Prevention Act of 2014. Congress is expected to enact this extension of an earlier mortgage holder relief law before taking its recess at the end of 2014. The House of Representatives already passed the extension, as H.R. 5771. The Senate is expected to pass its own version of the bill, and then the two will presumably be reconciled and presented to President Obama for his signature.
The new law is the extension of the federal Mortgage Forgiveness Debt Relief Act of 2007. This provision in the IRS Code was enacted by Congress in the aftermath of the collapse of the real estate market after the financial crisis of 2007. The Act relieves taxpayers from the previous provision of the IRS Code that had required a mortgage holder to report as income any mortgage debt forgiven by a lender, such as if a homeowner whose mortgage was more than the value of his or her home made a short sale and the bank accepted the sale price instead of the full amount of the mortgage debt.
Former IRS Code Provisions Will Be Superseded
Under the former IRS Tax Code provisions, if a homeowner borrowed money from a commercial lender and the lender later canceled or forgave the debt, the taxpayer might have had to report the canceled amount as income for tax purposes. The rationale was that when the taxpayer borrowed the money, he or she was not required to report the loan proceeds as income because of the obligation eventually to repay the lender. When that obligation was subsequently canceled, the amount received as loan proceeds became reportable as income because there was no longer any obligation to repay the lender. Under the former tax provision, the lender reported the amount of the canceled debt to both the borrower and the IRS on a Form 1099-C, Cancellation of Debt.
Mortgage Forgiveness Debt Relief Act of 2007
The Mortgage Forgiveness Debt Relief Act of 2007, for which the new bill is the continuation, allows a taxpayer to exclude from reportable income the amount canceled by the lender for a mortgage on his or her principal residence. The reduction of debt brought about by mortgage modification as well as debt effectively canceled as the result of foreclosure are both covered by this provision of the Code. Up to $2 million of debt is eligible for this exclusion ($1 million if married couples are filing separately). The amount excluded reduces the taxpayer’s cost basis in the home.
The Mortgage Forgiveness Debt Relief Act is effective retroactive to January 1, 2014, but it expires again in just a few weeks, on December 31, 2014. With time running out before the adjournment of the Congress, House leaders put together H.R. 5771 as a last effort to prevent tax increases for many Americans for 2014. Although many in Congress would have preferred to provide a longer-term solution for mortgage holders, most are also reconciled to the law as drafted as the best option, and the one most likely to be passed by both houses of Congress and signed by the President.
As experienced Massachusetts real estate attorneys, Pulgini & Norton can help you with all of your real estate legal needs. If you have a question regarding buying, selling, or financing a home, give us a call today at 781-843-2200 or contact our office online, and we can help legally clear the way for you.