The Color of Money | Restore the forgiveness tax break

There’s a tax break for struggling homeowners that Congress shouldn’t have let expire just before the new year. If it’s not extended, some people selling their homes could get big tax bills.

As the housing crisis in the middle of the last decade drove people into foreclosure, many borrowers were unaware that forgiven debt, including on mortgages, is considered income.

In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act to help people who were down on their luck financially because of the loss of their homes. The concern was well-placed. For people who couldn’t afford to keep their homes, getting a large tax bill just seemed cruel.

The tax exemption played an important role as borrowers who were unable to refinance their mortgages ended up selling them through short sales, in which the lender allows the borrower to accept a price that is less than the amount owed. Often, borrowers trying to get out from under a mortgage can negotiate to have the remaining balance forgiven.

The tax break was supposed to end in 2009. But it was extended twice through Dec. 31 because many people still needed help. It was a decent thing to do. Up to $2 million of forgiven debt qualified for the exclusion ($1 million if married filing separately). In addition to foreclosures or short sales, debt reduced because of a mortgage restructuring also qualified for relief.


However, money you borrow that is then canceled as a result of a foreclosure or short sale counts as income. If the debt is forgiven, the lender is required to report the amount because you no longer have an obligation to repay the money.


Critics say it’s time to move on. Allowing the tax break means less revenue for the federal government. Additionally, some taxpayers might be able to still get around owing taxes on forgiven debt if they qualify under what’s called the insolvency exclusion. You might not have to include forgiven debts as income if you can show that your total liabilities exceed your total assets.

Yet let’s get real here, folks. This is a tax break that needs to be restored — immediately.

Yes, things are a lot better than at the height of the housing crisis. In many areas, as housing prices increase, fewer owners are underwater, meaning they owe more than the home is worth.

However, the housing market hasn’t fully recovered. Things are better but not great. In November, the number of properties that received a foreclosure filing was

37 percent lower than a year earlier, RealtyTrac reported.

As part of JPMorgan Chase’s $13 billion settlement with the Justice Department and other federal and state partners stemming from misrepresentations about mortgages that were sold, the bank agreed to include consumer aid in the form of forgiveness of portions of people’s principal. Certainly, borrowers who might get some of their mortgage debt forgiven as part of that settlement or others because of misconduct by financial institutions shouldn’t face a tax bill.

Extending the mortgage-forgiveness tax break is the right thing to do.

Michelle Singletary writes for the Washington Post Writers Group.