The exclusion for forgiven home mortgage debt following a foreclosure, short sale or loan modification should be made permanent to provide relief to troubled borrowers and minimize the damage to families, neighbourhoods and communities.
That's according to recent testimony from the National Association of Realtors before the US House Ways and Means Subcommittee on Tax Policy at a hearing evaluating recently expired tax provisions.
NAR has long advocated for mortgage forgiveness tax relief, policy that was first established in 2007 at the onset of the housing and economic downturn and that has expired and been extended several times; most recently, early in 2018, it was retroactively extended to cover 2017. Without the exclusion, the debt that lenders forgive is considered taxable income and adds a tax burden at a time when an individual or family has experienced a true economic loss. NAR believes most of these people are already in financial distress and likely unable to pay additional taxes.
"The exclusion for mortgage debt cancellation delivers a huge dose of fairness. When the investment in a home goes well, and the owner sells at a gain, the tax code generously waives capital gains up to $500,000," said Realtor Barry Grooms, 2018 VP of Florida Realtors, who testified on NAR's behalf. "But what happens when things go sour, equity is lost and the family is forced to sell short? Up through last year, the exclusion stepped in and relieved the often-impossible tax burden. If allowed to expire, we are left with a tax policy that rewards good fortune but piles on when the tables are turned. This is neither fair nor smart."
While the home equity situation in America is much better today and the volume of short sales and foreclosures has receded from record highs, there are still about 2.5 million homes underwater, according to industry data. This is down considerably from the downturn, when as many as a quarter of mortgaged homes in the US had negative equity. Nonetheless, there are still a significant number of individuals struggling to keep up with their mortgage payments, and the exclusion is vital for lessening the financial impacts of a foreclosure, short sale or loan restructure and saving distressed families from a dire hardship.
In his testimony, Grooms urged Congress to make mortgage cancellation relief a permanent provision since the exclusion has already expired, leaving the future of troubled borrowers in serious doubt.
"Cases of negative home equity will ebb and flow as well, even with a stronger economy," said Grooms. "This is why we need a permanent exclusion to minimize the damage to families, neighborhoods and communities."
(Source: National Association of Realtors)
