Some homeowners trying to get out of mortgage debt may be one step closer to a break.
The House passed a bill that would exclude debt forgiveness from being counted as taxable income, a way of alleviating woes that have hit people with loans they can’t pay off. With mortgage woes a national issue now, the vote on the Mortgage Forgiveness Debt Relief Act was 385 to 27. The measure will now go to the Senate.
Over the years, huge tax bills have hit a lot of people by surprise after lenders have written off some of their debt. The amount written off is reported to the IRS, which then considers this income.
Nowadays, as property values slip a bit, more homeowners have been trying to do “short sales”, in which they sell their homes for less than what they owe on a mortgage they can’t pay off. Lenders agree to such deals because foreclosures are expensive and can take two years in New York, but later, most homeowners find they have to pay the tax price for being “forgiven” on debt.
“This is significant,” said Elon Bar-Evan, chief executive officer of Equity Creations Inc. in Middle Island, which does short sales for homeowners and also holds classes on the topic for real estate agents.
Bar-Evan said the tax implication is one of the two most often asked questions from clients. He said homeowners who can prove they’re insolvent may not have to pay taxes on debt forgiveness.
The bill was backed by the powerful Mortgage Bankers Association.
“For those borrowers who have worked through a troubled loan with their lender, they should not have to face a tax bill on the phantom income that results from debt forgiveness,” said John Robbins, chairman of the trade group.