Tax reform debates may stymie mortgage debt tax break extension

Despite some optimism at the beginning of the year, 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 may not be extended until after the November elections, according to the National Association of Realtors.

The federal Mortgage Forgiveness Debt Relief Act of 2007 expired on Dec. 31, 2013. While NAR believes there could be action in the U.S. Senate to extend this provision sometime this spring, the House of Represenatives has indicated otherwise, the trade group noted.

“(T)he House has said it does not want to extend temporary tax provisions until it completes work on comprehensive tax reform,” NAR said.

“Therefore, NAR believes an extension of the mortgage cancellation relief may not be passed until after the November elections.”

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 Los Angeles Times noted earlier this month, citing figures from the Congressional Research Service.