December 30th, 2014 9:41 AM by Linda Barratt PA and Justin Cervantes, PA
The Senate approved a bill late Tuesday that would retroactively extend over 50
expiring tax provisions for one year, including one that shields distressed
homeowners from paying taxes on any mortgage debt forgiven in a short sale.
The Senate approved the bill 76 to 16, which extends the provisions until Dec.
30 of this year (the one-year extension is retroactive). The House passed the
bill 387 to 46 on Dec. 3.
At one point, House and Senate lawmakers were close to a deal on a two-year
extension. But the White House objected because key business tax provisions
were given permanent status while others affecting low- and moderate-income
households would still have had to be extended each year.
"In my view, any agreement on permanent tax policies must be balanced
between support for businesses and support for working families. A deal that
only makes corporate policies permanent - or one sharply skewed in that
direction - would have failed the test of fairness," said Sen. Ron Wyden,
chairman of the Senate Finance Committee.
Under the bill, homeowners can deduct the cost of mortgage insurance premiums
on their 2014 tax forms. This tax break covers private mortgage insurance
premiums as well as premiums paid on Federal Housing Administration, Department
of Veterans Affairs and Rural Housing Service guaranteed loans. The U.S.
Mortgage Insurers welcomed the extension.
"USMI commends passage by Congress last night of a one year extension of
vital homeowner tax relief. We are especially pleased that the legislation
includes the tax-deductible treatment of mortgage insurance premiums for low
and moderate income borrowers. We look forward to working with Congress towards
permanent enactment of this important tax relief for homeowners,"
according to the private mortgage companies.
About 3.6 million taxpayers claimed the mortgage insurance deduction in 2009,
according to analysts at Compass Point Research and Trading LLC.
The bill also ensures underwater borrowers that sold their homes in a short
sale in 2014 will not be penalized.
Prior to the housing bust, troubled homeowners had to pay taxes on any mortgage
debt that was canceled or forgiven by a lender. The amount of forgiven mortgage
debt was treated as ordinary income and taxed accordingly.
The "Mortgage Forgiveness Debt Relief Act is crucial to foreclosure
mitigation efforts such as principal forgiveness and short sales," said
Isaac Boltansky, an analyst with Compass Point.
In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act so that
distressed borrowers would not be penalized for doing a short sale. Congress
extended this tax relief in 2009 and 2012, but failed to pass a tax extender
bill at the end of 2013.
Since 2008, more than 800,000 distressed homeowners have taken advantage of
this tax break, according to Rep. Charles Rangel, D-N.Y., an original sponsor
of the debt forgiveness bill in 2007.
Short sales have been declining over the past few years due to an improving
economy, lower foreclosures and the uncertainty over the tax consequences of a
short sale or deed in lieu transaction, where the homeowner simply signs over
the deed to the house to the bank and vacates the property.
Fannie Mae and Freddie Mac servicers completed 27,800 short sales during the
first eight months of this year, compared to 87,740 in 2013 and 125,232 in 2012.
Boltansky noted that the retroactive reauthorization for 2014 also gives
Federal Housing Finance Agency Director Mel Watt a shield to resist Democratic
pressure to permit principal reductions on Fannie and Freddie loans.
Watt "will have additional political cover to reject calls to embrace the
principal reduction through HAMP as the tax consequences could limit borrower
participation" he wrote in a Dec. 2 report.
Courtesy of Brian Collins DEC 17, 2014 12:27pm ET