To the dismay of housing advocates, industry groups, and U.S. legislators, a tax break for distressed homeowners who mortgages were written down expired on Dec. 31. The 2007 measure exempted borrowers from federal taxes they normally would owe on assistance received from banks, primarily in the form of short sales and forgiven home loan debt.
Although the residential property market is in recovery, housing advocates contend that the tax break put in place after the market crash is still needed. More than 6 million homeowners in this country still owe more on their mortgages than the underlying properties are worth, they say, and failure to renew the tax break would only increase their financial burden.
A report by the Congressional Research Service calculates that a middle-income homeowner who is granted a $20,000 reduction in mortgage debt could expect to owe $5,600 in federal taxes under the new reality. "It makes absolutely no sense," according to Sen. Debbie Stabenow (D-Mich.). "This is not just about fairness for homeowners. This is about keeping the housing recovery alive." Many of her colleagues agree, given the broad bipartisan support for an extension of the law. While Congress went on holiday break without taking action, it could revisit the issue as soon as next week, possibly passing a retroactive extension.