Mortgage Debt Cancellation Tax Relief Update

There is a slim but powerful chance the Mortgage Debt Forgiveness Act will be extended by Congress this year but not before the midterm elections in November.  Congress adjourns for the year on December 12.

Recall this tax relief is for households who've had mortgage debt forgiven (AKA 'phantom income') by a lender as part of a short sale or loan modification. (The California Legislature already extended this provision as applies to state taxes by virtue of Assembly Bill 1393.)

In April, the United States Senate Finance Committee approved a bipartisan bill that, if enacted, would reinstate more than 50 tax provisions that expired at the end of 2013.

Among the real estate provisions included in the "extenders" package are tax relief for mortgage debt forgiveness; 15-year cost recovery for qualified leasehold improvements; election to expense certain qualified real property; and, the deduction for energy efficient commercial buildings.  Under the bill, all of these provisions would be retroactively extended to cover a period from January 1, 2014, to December 31, 2015.

In May, the tax extenders bill moved to the floor of the Senate where, unfortunately, it became bogged down over partisan election-year politics.  Essentially, the Republicans and Democrats in the Senate came to a standoff regarding whether or not certain amendments should be allowed to be offered to the legislation.  When the Democratic Majority Leader of the Senate refused to allow an open amendment process, Republicans exercised their rights to prevent the bill from moving to a vote.  After almost two weeks of this wrangling, the Leader indicated that there is almost no hope of this bill being passed until after this fall's elections.

The good news is that approval of the tax extenders bill by the Finance Committee demonstrated that these provisions have a lot of support on both sides of the political aisle.

The lack of action on this issue in the House of Representatives is just as frustrating as the stand-off in the Senate.  The House Ways and Means Committee, led by Chairman Dave Camp (R-MI), decided to take a different approach than the Senate towards dealing with the expired tax provisions.  Camp and other GOP representatives decided to concentrate on passing permanent extensions of only a few expired tax provisions that they believe are worthy of being made a perpetual part of the tax law.

Unfortunately, the mortgage debt cancellation tax relief provision is seen by most as a temporary measure, which should be allowed to expire once the housing crisis has fully worked itself out.

SAMCAR, following NAR's lead, has encouraged Senators Feinstein and Boxer to find a way to break the impasse on the tax extenders bill. We have also been communicating with our Representatives (Jackie Speier and Anna Eshoo) to garner more support for the stand-alone legislation in the House that would extend only the mortgage debt cancellation tax relief provision.  As noted previously we are pressing for swift action on an extenders package following the midterm elections.

How can you help? One of the most powerful messages will come if you have clients in distressed situations. Urge them to weigh in with our members of Congress. And as always, SAMCAR cautions REALTORS® against giving clients tax advice, as every situation is different.