Mortgage debt tax break expires, but likely to be extended

As Jan.1 rolled around, Congress failed to extend a 6-year-old federal law that allowed homeowners to avoid liability for federal income tax on debt forgiven in a short sale or through a principal reduction.

But bipartisan support and backing from major real estate industry players, including the National Association of Realtors and the Mortgage Bankers Association, and dozens of consumer groups and housing advocates, means that Congress will likely extend the tax break through 2015 and apply it retroactively to Jan. 1, the Los Angeles Times reported.

While in some states, such as California, state law means that mortgage debt forgiven as part of a lender-approved short sale is not taxable income at either the state or federal level, that exemption does not apply to mortgages modified when lenders forgive part of the principal owed.

A middle-income homeowner with a principal reduction of $20,000 would face a $5,600 tax bill if the law is not extended, the Times said, citing figures from the Congressional Research Service.

“It makes absolutely no sense. It is, frankly, outrageous,” said Sen. Debbie Stabenow, D-Mich. “This is not just about fairness for homeowners. This is about keeping the housing recovery alive.”

Source: LA Times