The Fiscal Cliff and its impact on the Mortgage Forgiveness Debt Relief Act.
The Lawhead Team has been staying up to date with the upcoming fiscal cliff and would like to share with our readers how it pertains to the housing recovery, particularly the mortgage forgiveness debt relief act.
Impact of the Fiscal Cliff, by Juliette Montoya-Cesena with WJ Bradley Mortgage Capital.
The fiscal cliff, the popular term for the upcoming tax increases and spending cuts if legislators fail to intervene, is weighing on the minds of most Americans. Caught up in the midst of the fiscal cliff debate are pieces of real estate legislation that housing experts say could significantly impact the housing recovery.
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
The Mortgage Forgiveness Debt Relief Act is set to expire on Dec. 31, 2012. The law, enacted in 2007, temporarily amended the federal tax code to enable taxpayers to omit income debt reduction or cancellation on their primary residence. Debt reduction through restructuring of a mortgage, for example, refinancing and debt forgiveness through a foreclosure generally qualify under the law.
Why the Expiration Matters
An estimated 11 million homeowners are underwater. Any homeowners who participate in a short sale that closes after Jan. 1, 2013, will be subject to taxation on the amount of debt forgiven if the law is not extended.
In addition, the $25 billion settlement states reached with five top mortgage lenders over the so-called robo-signing scandal urges lenders to forgive billions in mortgage debt next year and in the future. The expiration of the tax relief act could deter Americans from taking part in the settlement, according to attorneys general of the participating states.
Housing experts argue that the expiration of the mortgage forgiveness debt relief act law would cause significant financial pain for a large group of homeowners who are already under duress.
The Mortgage Interest Deduction
As legislators propose ways to reduce the deficit and avert the fiscal cliff, legislators are proposing reducing the mortgage interest deduction.
The mortgage interest deduction lets homeowners reduce their annual taxable income by the amount of interest paid on their mortgage. The deduction is the largest of its type in the tax code, accounting for an estimated $90 billion in reduced income tax revenue.
The housing industry is fighting changes to the policy, arguing it would hurt the housing recovery, and therefore the economic recovery.
“This is the last thing Congress should be considering when what we’re trying to do is stabilize the economy,” Jerry Howard, head of the National Association of Home Builders, told The Hill.
Do you have further questions about the Fiscal Cliff and the Mortgage Forgiveness Debt Relief Act? Please call or email us, The Lawhead Team, Because Two Lawheads Are Better Than OneTM.