End of Tax Break for Mortgage Fixes Could Mean Big Bills

The new year brings bad news for mortgage borrowers who were granted debt forgiveness.

Jan 25, 2014 at 12:44PM

The new year brings bad news for mortgage borrowers who were granted debt forgiveness. That money now can be treated as income leading to unexpected and unwanted income tax obligations.According to IRS regulations, if a family is behind on its mortgage and the bank reduces the borrower's loan principal or forgives the mortgage balance after a short sale, in which the seller owes more than the selling price, the amount of debt forgiveness would be taxable income, despite the fact that these are paper profits. These rules also apply to foreclosed property.

For example, let's say that a homeowner purchased a home at the peak of the market for $750,000, but sold it in a short sale for $500,000. Currently, that $250,000 would be taxed as income, even though it was phantom revenue and never changed hands.

Mortgage Foreclosure Debt Forgiveness Act
In 2007 after the mortgage meltdown, Congress passed the Mortgage Foreclosure Debt Forgiveness Act. Up to $2 million of debt forgiven by foreclosure, short sale, or loan modification qualified for tax relief. The law was extended twice, but finally sunset Dec. 31, 2013.

As of this writing, Congress is unable to agree on paying its own already authorized bills and faces another potential government shutdown in mid January. Since the lapse of the Debt Forgiveness Act will bring in more revenue, some in Congress aren't eager to restore it. However, it will make life difficult for somebody who could not afford to pay a mortgage or shell out taxes on debt forgiveness.

Today, the only protection for these homeowners lies in the tax code's insolvency exclusion. Borrowers are deemed insolvent when their debts are more than the fair market value of their total assets. If this situation applies, some or all of the cancelled debt may not be taxable.

Improvements, but not housing market not fully recovered
The real estate market improved significantly last year. Foreclosures are at the lowest levels in seven years. According to RealtyTrac, 37 percent fewer properties had a foreclosure filing in Nov. than in the same month a year before with a total of 113,454 properties. Filings are significantly lower than the monthly average of 300,000 during the depths of the financial crisis.

Fewer people are facing the loss of their homes so the tax break does not have the urgency it once had. In fact, bills to extend it are stuck in committee. It is useful to take a longer perspective. When the real estate market was still strong in Dec. 2005, only 49,236 U.S. properties started the foreclosure process.

The U.S. real estate market has not fully recovered. According to Zillow, 11 million homeowners still have negative equity in their homes. That is more than the number of residents in 43 states. Although bank repossessions dropped overall to a 76-month low, five states showed increases in Nov. compared to the year before: Delaware by 179 percent, Maryland by 41 percent, Connecticut by 9 percent, Maine by 6 percent, and Iowa by 2 percent.

Make 2014 your best financial year ever
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

This article originally appeared on MyBankTracker.com

The Motley Fool recommends Zillow. The Motley Fool owns shares of Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers