We are circling back to our discussion of the tax extenders law passed by Congress just before the holidays. In our Jan. 5 post, we left off with a promise to talk about how a homeowner can handle an underwater mortgage. As a reminder, a mortgage is underwater when the borrower owes more than the home is worth. And, these tax extenders expired almost as soon as they were adopted; they apply to the 2014 tax year alone.
In some cases, the lender may forgive part of the principal to bring the loan in line with the home’s value. The homeowner can default on the mortgage and allow the lender to foreclose. The homeowner can also list the property as a short sale.
In a short sale, the lender allows the homeowner to sell the property for less than the amount owed on the mortgage note. The lender writes off the loss, the homeowner gets out from under the debt, and the buyer may get a pretty good deal.
The problem is that the federal government sees the deal as a windfall for the homeowner. In theory, the homeowner has made money by selling for less than he owes; the homeowner must report the difference between the sale price and the amount owed on the mortgage as income. Rather than shedding the unmanageable debt, the homeowner has swapped one obligation for another. Not exactly the point.
Under the Mortgage Forgiveness Debt Relief Act of 2007, homeowners were relieved of that obligation. With the mortgage debt forgiveness exclusion, the amount forgiven by the lender is no longer counted as income.
By renewing the extension three times before this year, Congress has admitted that the provision does help the people it is supposed to help. What is not helpful is the uncertainty that comes with a one-year renewal.
We’ll review more tax extenders in our next post.
Source:Forbes, “10 Expired Tax Provisions That Might Affect You In 2014,” Kelly Phillips Erb, Nov. 24, 2014