Protecting Struggling Homeowners at Tax Time

Back in 2007, policymakers became keenly aware that struggling homeowners faced mounting debts. The largest debt included the “sale” of their foreclosed home. This became taxable income since the debt was seen by the IRS as income from a sale. Of course, it was anything but income. A nasty surprise also awaited families who were lucky enough to achieve some form of principle reduction, the IRS considers forgiven debt to be income. In reality, foreclosed homeowners never saw these dollars and beneficiaries of principle reduction were just hanging on and in no position to pay a tax bill on an enormous loss. (Policy Matters Ohio, along with the National Community Tax Coalition, offered a webinar on the tax implications of foreclosure earlier this month.) With bipartisan support, Congress enacted the Mortgage Debt Forgiveness Act (which was extended to 2012 under the Emergency Stabilization Act of 2008). The Act allows taxes on their debt to be canceled, saving already struggling families thousands of dollars in tax liability. The price tag is minimal, especially given the suffering saved and the fact that the result of the Act to this point has been demonstrable prevention of home vacancy and reduced maintenance costs in communities.

Thanks to the multibillion dollar mortgage settlement thousands and thousands of homeowners will negotiate short sales and new loans with their lenders. The overall picture for housing remains very troubled and in some markets, the conditions are worse now than they were two or three years ago. Sunbelt and Midwest states should be particularly concerned about any efforts that undermine real efforts to keep families in their homes.

The good news is that Congressman Charlie Rangel (D-NY) has introduced a bill to extend the provision for two more years. HR 4202 has 15 cosponsors so far. The need for this provision has not abated and should grow while the mortgage settlement is put into effect. Congressman Rangel should be applauded for taking the lead on this issue, now Congress as a whole should follow his initiative.

Author:

David Rothstein is research fellow in New America's Asset Building program. He is also a researcher at Policy Matters Ohio and project director for the Ohio CASH Coalition. There, David researches and advocates on asset building, consumer protection, tax and housing issues.