A law offering homeowners a tax break when a portion of their mortgage debt is forgiven through a loan modification, short sale or foreclosure is about to expire, leaving thousands of homeowners in limbo.
The U.S. Senate failed to pass legislation designed to extend the Mortgage Debt Relief Act -- a development that suggests potential tax complications lie ahead for certain homeowners.
The House has yet to vote on the extension, and the Senate failed to get it through – making it likely the extension will not take effect by the program's Jan. 1 expiration date.
Without this extension, Elyse Cherry, CEO of Boston Community Capital, says a successful principal reduction program operated by her firm is in jeopardy. Even still, she believes Congress is likely to pass the bill early next year with a Jan. 1, retroactive date.
"Assuming it is retroactive to Jan. 1, then everybody is fine," Cherry told HousingWire. "But if it doesn’t get passed, then anyone who goes through a principal reduction in 2014 will be impacted."
Cherry is not the only one concerned.
Nevada Attorney General Catherine Cortez Masto and 41 other attorneys general urged Congress to extend the tax break to ensure distressed homeowners do not face large penalties when trying to deal with a stressful financial situation.
"The tax relief exemption for distressed homeowners is crucial for Nevada’s economy," said Masto. "Nevadans were hit hardest by the subprime mortgage failures and we are beginning to rebound from the economic crisis. If it is not extended for 2014, many families will be facing yet again the torment of trying to save their homes, families, and their American Dream."
Without the bill in place any mortgage debt forgiven is treated as a profit and taxed accordingly. U.S. Sen. Debbie Stabenow, D-Mich., brought a law extending the provision to the house floor Thursday, but it failed.
Still, consumer advocates say all hope isn't lost.
Diane Thompson, an attorney with the National Consumer Law Center, believes the extension has strong bipartisan support. "It will move eventually. The sooner the better," she said.
But even with Thompson confident in the tax relief’s eventual extension, she is somewhat alarmed about starting a new year without the issue finalized.
"Yes, we are very concerned," she told HW.com. "The reason is I know there have been homeowners who have turned down principal reduction modifications because they are afraid of the tax consequences."