Debt Forgiveness Should be Permanent Part of Tax Code

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Prior to the housing crisis, homeowners who
defaulted on their mortgages faced tax consequences if their lender had to
write off or write down any part of the outstanding balance
.  That often happened after the collateral was sold
after a foreclosure, deed-in-lieu, or short sale, and write-downs were sometimes
included as part of a mortgage modification as well.  The deficit amounts were reported to the IRS
as forgiven debt and were subject to being taxed as income.

In 2007, as the numbers of distressed
mortgages was mounting, Congress put a temporary policy in place to exclude
forgiven home mortgage debt from any tax obligation
.  That exclusion has been extended several
times.  It expired in 2017, but early
this year it was extended retroactively to cover the previous year

The National Association of Realtors® (NAR) has long advocated for making the
exclusion permanent. They maintain that taxing forgiven debt as income adds an
additional burden on an individual or family just as they have actually experienced
true economic loss, and when they are unlikely able to pay additional taxes. On
Tuesday a representative of the Association testified to that effect before the
U.S. House Ways and Means Subcommittee on Tax Policy at a hearing evaluating
recently expired tax provisions.

Barry Grooms, 2018 vice president of Florida Realtors®, testified on behalf
of NAR.  He told committee members, “The
exclusion for mortgage debt cancellation delivers a huge dose of fairness. When
the investment in a home goes well, and the owner sells at a gain, the tax code
generously waives capital gains up to $500,000. 
But what happens when things go sour, equity is lost and the family is
forced to sell short? Up through last year, the exclusion stepped in and
relieved the often-impossible tax burden. If allowed to expire, we are left
with a tax policy that rewards good fortune but piles on when the tables are
turned
.”  He added, “This is neither fair
nor smart.”

The home equity situation is much better today than when the exclusion was
first put in place and there is no longer the avalanche of short sales and
foreclosures.  However, NAR says, in a
press release regarding Groom’s testimony, that there are still about 2.5
million homes in negative equity. This means there is still a significant
number of households struggling to keep up with their mortgage payments. “The
exclusion is vital for lessening the financial impacts of a foreclosure, short
sale or loan restructure and saving distressed families from a dire hardship,”

In his testimony, Grooms urged Congress to make mortgage cancellation relief
a permanent provision in the tax code.  Since
the exclusion has already expired, he said, the future of troubled borrowers in
serious doubt. “Cases of negative home equity will ebb and flow as well,
even with a stronger economy.  This is
why we need a permanent exclusion to minimize the damage to families,
neighborhoods and communities.”



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