For the second consecutive year, key federal tax breaks for homeowners are about to expire; but little effort is being made to extend mortgage-forgiveness debt relief and deductions for mortgage insurance payments and home energy-efficiency retrofits beyond Dec. 31.
Last year at this time, there was at least a formal bill pending to extend them. Now, the House and the Senate are focused on hammering out a budget and a potential major overhaul of the federal tax system. Consequently, the tax treatment of mortgage debt relief is at stake.
Prior to Congress changing the law six years ago, any borrower who had a debt canceled by a creditor would have to report the amount forgiven as ordinary income, subject to federal taxation. If a lender opted to cut a homeowner’s principal balance as part of a loan modification, the IRS would treat that reduction amount as fully taxable income.
Legislators carved out a special exception for owner-occupied housing for five years -- an exemption that was later extended through the end of this year. If it expires, thousands of people who are in the process of doing short sales on their residences but who will not close until next year may be subject to income taxes on the amounts their lenders cancel as part of the deal.