The Senate Finance Committee is expected to mark up a bill on Thursday that would extend 45 tax provisions – including the Mortgage Debt Forgiveness Relief Act, which spares distressed borrowers from being penalized by the Internal Revenue Service when they agree to a short sale or loan modification.
The Act expired on Jan. 1, due to the fact that Congress failed to vote on it last year, but industry stakeholders, as well as consumers, continue to fight for an extension of two years.
The Act creates an exception to the tax code that states when a borrower is relieved of a debt, the amount forgiven is treated as income subject to taxation at ordinary rates.
Senate Finance Committee Chairman Ron Wyden, D-Ore., included a two-year extension in his tax bill unveiled Tuesday.
Advocates for the extension point out that without the Relief Act in place, the federal government is taxing the very homeowners it is seeking to assist through home foreclosure prevention programs such as the Home Affordable Modification Program. They point out that this threat of being taxed on debt forgiveness is causing many homeowners to think twice before modifying their mortgage or completing a short sale.
Wyden's tax bill would also extend the deduction for mortgage insurance premiums for two years.
While congress routinely allows tax breaks to expire and then re-instates them, often retroactively, there's a lot at stake here for struggling homeowners.
What's more, although the extending the Mortgage Debt Forgiveness Relief Act has broad support, tax reform may not take place at all this year, as Congress has little time to debate and mark up all 45 provisions comprising the proposed tax bill.