Mortgage tax benefits imperiled — again
Tax relief for mortgage-debt forgiveness and deductions for mortgage-insurance payments and home energy-efficiency improvements will expire Dec. 31, and so far no relief is in sight from Congress.
WASHINGTON — Haven’t we seen this movie before? On Capitol Hill for the second year in a row, key federal tax assistance for homeowners is heading for expiration within weeks. And there’s no sign that Congress plans — or has the minimal political will — to do anything about it.
In fact, the prospects for extension of popular mortgage-forgiveness debt relief and deductions for mortgage-insurance payments and home energy-efficiency improvements appear to be more dire than they were last year at this time, when at least there was a bill pending to extend them.
This year there is none, at the moment. The House and Senate are spending their time trying to figure out a budget, but are also considering overhauling the entire tax system, which could mean that a long list of special-interest tax preferences — including for housing — might be sucked into the tax-reform vortex and never revived if they expire as scheduled Dec. 31.
Robert Dietz, vice president for tax-policy issues at the National Association of Home Builders, says the name of the movie is “Groundhog Day” — the Bill Murray classic about déjà vu all over again.
Remember last year’s New Year’s Eve “fiscal cliff” game of chicken that wasn’t resolved until the wee hours of Jan. 1? The tax benefits for homeowners were ultimately extended, but only for a year. Whether that’s possible again in late December is in doubt.
What’s at stake here? Begin with tax treatment of mortgage-debt relief. Before Congress changed the law in 2007, 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 mortgage lender chose to reduce a homeowner’s principal balance as part of a loan modification — say by cutting $50,000 off the mortgage balance — the IRS would treat that $50,000 as fully taxable income.
That’s despite the fact that the owner never actually received $50,000 in cash, and despite the fact that it was highly likely the owner was already in distress on the loan, facing financial challenges that made payments on the previous balance difficult.
Congress carved out a special exception for owner-occupied housing for five years, and that exception was later extended through Dec. 31. What happens if it expires? It would mean thousands of people who are in the process of doing short sales on their homes but won’t close until 2014 may be subject to income taxes on the amounts their lenders cancel as part of the transaction.
Underwater owners who sign up for short sales in 2014 — or owners who receive cancellation of debt as part of loan modifications — would all be subject to harsh taxes on their phantom “income.”
Elizabeth A. Weintraub, a real-estate broker in Sacramento, Calif., who specializes in short sales, has a client who faces a $60,000 tax bill from the federal government on a $400,000 mortgage debt if a short sale is not completed before Dec. 31.
Though Weintraub says “we are pushing” a short-sale vendor working for Bank of America to get the deal done in time, it may not happen because “they move at their own speed” — far beyond Weintraub’s or her client’s control.
But mortgage-debt relief is hardly the only real-estate tax benefit set to disappear. Also scheduled to terminate unless extended:
• The 10 percent credit allowable for energy-saving improvements to your house, including qualified insulation, high-performance windows, doors and roofs. The credits have a lifetime cap of $500.
• The $2,000 credit for newly constructed homes that meet federal standards for energy efficiency.
• The mortgage-insurance premium write-off for anyone who takes out a home loan with a down payment below 20 percent. This includes conventional Fannie Mae-Freddie Mac loans, Federal Housing Administration-insured loans and VA guaranty fees.
This may be particularly important next year for new buyers who use FHA loans because that agency has raised its insurance premiums significantly and withdrawn its previous rule that allowed borrowers to cancel their insurance premiums, as is standard in private mortgage insurance.
Best advice for anyone counting on one or more of these tax benefits in early 2014: Don’t. This time around, it’s possible some of them may not come back.
Ken Harney’s email address is firstname.lastname@example.org.