The Mortgage Debt Relief Act of 2007 is going to end this year. Till now, it has enabled borrowers to avoid paying the income taxes on the forgiven principal amount. If the tax relief expires, then homeowners will be liable to pay the taxes on the forgiven debt as it will be considered as their income by the IRS.
It has been noted that the Congress has been urged to lengthen the Mortgage Debt Relief Act of 2007 in order to help the troubled home mortgage borrowers. However, whether Congress will act toward it by the year end remains unknown. Though some Republicans and Democrats have urged for an extension, the debt relief option may probably come as a part of broader tax law change package.
The tax relief expiration comes as a shock for many as various federal policies are making debt forgiveness quite common. At this point, if the tax break expires, then, it will jeopardize the progress that has been made in the past 1 year. Let’s take a look at what progress has been made:
Increase in incentives: It should be noted that in January 2012, the Treasury Department tripled the incentive it pays to the lenders for mortgage modification. Moreover, after the Federal and State legal settlement over foreclosure abuses, the 5 major lenders have to cut about $10 billion in debt for troubled borrowers. Moreover, Fannie Mae and Freddie Mac also streamlined the short sale process. The effects of these steps were quite encouraging. Lenders reduced quite a large amount of the principal owed through loan modification.
Reported progress: Due to the various steps taken by the government, progress has been reported. It has been noted that lenders like Wells Fargo and Bank of America cut about $2.55 billion in principal on first mortgages. Lenders have also approved 113,000 short sales for another $13.1 billion in write-downs. Due to the fear that an end to the tax break could threaten the progress on settlement, 40 state attorneys general have sent a letter to Congress and urged the extension of tax break.
Suggested options: The Mortgage Relief Tax Break will be applied to debts forgiven through the end of this year. This will make it possible for Congress to retroactively institute the required changes sometime in 2013. However, a delay in taking the right decision will create uncertainty and may prevent some transactions. There are some politicians who are even pushing for a broader overhaul. At present, the law counts forgiven debt from cash-out refinances as taxable income. Some of the politicians and advocates will like to see that exception dropped because it creates a large paperwork burden for everyone.