Congressional inaction turns mortgage relief into tax burden
The House of Representatives adjourned for the year without an extension on the Mortgage Debt Forgiveness Relief Act (MDFRA), a 2007 law that prevents forgiven mortgage debt from being taxed as income. Starting January 1, any mortgage debt forgiven is eligible to be taxed, creating potentially burdensome liabilities for the millions of Americans in stages of mortgage delinquency as they seek relief to prevent foreclosure.
Prior to MDFRA, Americans who received either a reduction in their mortgage principal or debt forgiveness through the sale of their property were required to report those savings as income for purposes of taxes. Six years ago, Congress recognized that with the collapse of the housing bubble, this aspect of the tax code would result in many Americans owing large portions of their annual income to the IRS.
Many Americans facing foreclosure received relief from the National Mortgage Settlement, a deal between the federal government and five major banks requiring them to forgive large amounts of mortgage debt. The average principal reduction under the National Mortgage Settlement between March 2012 and July 2013 was $108,000 per borrower. Without the MDFRA, the homeowner making $50,000 per year would have to report an annual income of $158,000. Using a simple tax calculator, the homeowner would owe 34,733 to the IRS, or nearly 70 percent of the homeowner's annual income in a single tax bill.
Now that the MDFRA has expired, the only way homeowners can avoid taxation on their mortgage reduction is to prove insolvency to the IRS.
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http://america.aljazeera.com/watch/shows/the-stream/the-stream-officialblog/2013/12/13/congressional-inactionturnsmortgagereliefintotaxburden.html