Senate Passes Tax Bill That Includes Key Mortgage Deductions

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.

 

source  Brian Collins

DEC 17, 2014 12:27pm ET

House OK’s Short Sale Tax Break, On to Senate

Daily Real Estate News | Monday, December 08, 2014

looking over documents The U.S. House passed a bill last week that would extend key tax breaks to financially distressed home owners who went through a short sale. The bill now goes before the Senate for consideration, where housing analysts hope for action during the final week of the Lame Duck session of Congress.

The National Association of REALTORS® has been calling on members to urge Congress to renew the Mortgage Debt Forgiveness Act, an income exemption on mortgage debt forgiven in a short sale or a workout for principal residences.

The act expired at the end of 2013. That means distressed home owners could be responsible for paying pay taxes on “phantom income” from any forgiven debt once the properties are sold. That is, if a lender sells a property for less than the amount owed on the mortgage, the home owner will then have to report that forgiven debt as taxable income to the IRS. The tax on a 2014 short sale or workout would be due April 15 of next year if Congress fails to extend the measure. If the Mortgage Debt Forgiveness Act extension is granted, taxpayers will be able to continue to exclude the forgiven debt from their annual income calculations.

The House included a one-year extension of the Mortgage Debt Forgiveness Act in the Tax Increase Prevention Act of 2014, which passed the House on Wednesday in a vote of 378-46.

In the first three quarters of this year alone, there have been more than 170,000 short sales, representing a total bill of $8.1 billion in mortgage debt forgiveness, according to estimates from RealtyTrac. But the lapse in the extension has caused some home owners to avoid short sales and workouts. Still, more than 5 million home owners remain underwater, owing more on their mortgage than their home is currently worth. Also, nearly 1 million households are seriously delinquent on their mortgages or are in foreclosure.

“Unless Congress acts, hundreds of thousands of American families who did the right thing will have to pay tax on ‘phantom income’ – money they never see,” read an ad issued by NAR last week that ran in select Capitol Hill publications.

Source: “Short Sale Tax Break Passes House,” HousingWire (Dec. 5, 2014)

No Foreclosure During Short Sale

In a recent California case, the judge ruled in favor of homeowners saying it is illegal to foreclose while a short sale is being negotiated. The Court opined: Most dual tracking claims involve a borrower’s application for a loan modification and CC 2923.6.

Dual tracking is also prohibited, however, if a borrower and servicer agree to a non-modification foreclosure alternative, like a short sale.

If a short sale agreement is in writing, and if the borrower submits proof of financing to the servicer, a servicer may not move forward with the foreclosure process. CC § 2924.11(a)-(b). Here, servicer was still reviewing borrower’s short sale application, but had already received proof of financing when it foreclosed.

Even without evidence of a final, approved, short sale agreement, the court found borrowers to have stated a viable dual tracking claim under CC 2924.11 and overruled servicer’s demurrer.

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