Though the housing market is in remarkably better shape than it was in 2007, there are still large numbers of homeowners with significant negative equity. In fact, approximately 7 million of these property owners have mortgage debt approximately 25 percent higher than the value of their property.
Homeowners under such circumstances often negotiate with lenders to modify their loans and forgive some of the debt. They may even attempt to write off portions of their debt through short sales. However, these homeowners then face another problem – the forgiven debt can be subject to taxation. The IRS treats this debt forgiveness as ordinary income which faces tax treatment.
Likely due to the financial difficulties these homeowners have already faced, current legislative efforts in Congress would provide protections for these individuals facing federal taxes placed on the forgiven debt. We will still have to wait and see if implementation of such tax relief actually occurs.
Prior legislative mortgage protection relief for individuals receiving tax write-offs in 2014 expired this past December. This means these homeowners currently have no legal protection against taxes for forgiven tax debt on money owed in 2015. The current bipartisan bill would extend the mortgage debt relief until the end of 2016.
There are a number of large metropolitan areas with negative equity levels that are extremely high. One such locality is Cleveland with rates reported as high as 45 percent. The negative equity rate in Chicago is even higher at 48 percent.
Whether the legislation does pass, it’s important to remember that not all real estate will qualify for any tax exclusion. Also, homeowners may wish to contest the exact amount of claimed forgiven debt. There are experienced tax attorneys who can address such questions about handling of this mortgage debt.
If you would like to discuss IRS tax relief with a tax attorney:
Source: LA Times, “Mortgage debt forgiveness still a taxing issue for many short sellers,” March 15, 2015