Homeowners with underwater loans face the possibility of a large tax bill if they obtain a principal reduction through a deal with their lender, a foreclosure or a short sale in 2014. Congress recently returned from its summer vacation and now many wonder whether legislators will pass relief for struggling homeowners.
Bank of America recently agreed to a settlement with the U.S. Department of Justice over toxic loans, which includes borrower relief through principal write-downs. The problem is that the tax code treats the amount forgiven as ordinary income. For example, a $10,000 reduction in principal could result in a surprise tax bill and federal tax lien if you cannot pay. A temporary exception to the general rule had been in effect, but expired December 31.
Before leaving for summer vacation, the Senate Finance Committee voted to approve an “extender” tax bill renewing the debt forgiveness law. However, before the full Senate could vote on the measure an issue came up over an amendment that would end medical devise excise taxes. Now it appears that the bill will not be considered until after the mid-term election in November.
The House will not likely schedule its own vote, but also will not block a short-term extender bill if it passes the Senate.
For Bank of America customers there may be an added protection even if no mortgage relief passes this year. In the settlement, Bank of American must help to pay a portion of the tax bill that customers may have because of a principal reduction if Congress doesn’t act.
Any extension of relief may not come until right before the year-end, which will not help many people dealing with distressed properties. A tax attorney can discuss options and ways to handle possible tax liabilities.
Source: The Washington Post, “As congress returns, tax breaks for owners with underwater loans remain uncertain,” Kenneth Harney, September 12.