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 formal 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 federal 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 on 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 deja 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.