It’s Time To Demand The Mortgage Forgiveness Debt Relief Act Extension

I am not sure why, but there isn’t much talk yet about extending the Mortgage Forgiveness Debt Relief Act into 2014.

Before you (yawn) and figure this topic doesn’t impact you, you might want to reconsider your position.

In fact, this issue will have a significant impact on home values for the next five to ten years, so you might want to take the time to speak your mind.

NOTE: This Article Will Be Periodically Updated As Events in Washington Unfold. Please scroll to the bottom and find the dated updates.

The Mortgage Forgiveness Debt Relief Act Extension And Debt Cancellation

Only our government could create a program with this long of a name, but in its defense, the Mortgage Forgiveness Debt Relief Act has been a major contributor to the housing market recovery that is ongoing throughout most of the United States.

As the IRS website explains it,

If you borrow money and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Originally scheduled to end in 2012, it was extended another year to cover 2013 as well.

But not 2014.

Not unless Congress decides to extend it again.

Consider this your cue to get involved.

Why The Mortgage Debt Relief Act Needs To Be Extended

The Mortgage Forgiveness Debt Relief Act 2014There are millions of people in the US who owe more on their homes than they are worth. And we know many of them would like to sell their homes, but they are trapped again. Many will want to do a short sale.

If these upside-down homeowners were to sell a home today (meaning go to contract today but close after the turn of the year), they would incur an income tax penalty for any debt relief they obtained through a short sale.

To determine how many people might find themselves in this position, we can take a look at information gathered and prepared by the National Association of Home Builders regarding the length of home ownership in the United States.

The Mortgage Forgiveness Debt Relief Act

The table above shows that roughly 30% of single family homeowners move within the first 6 years of home-ownership, while 50% move within the first 15 years. That means people who paid a premium for their homes during the housing bubble (2004 to 2007) will be hitting the market in mass from 2010 to 2022. Basically, this means were are really only 3 years into the recovery for these upside-down homeowners.

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Of course, these statistics were created from past home sales, prior to the housing bubble. The rate of sales “back then” was not abnormally impacted by owning a home with a negative value, so people who no longer wish to own their upside-down home might be moving faster than was historically anticipated. Does this mean there could be many more sellers wanting to hit the market right now?

UpdateUPDATE: March 20, 2014

From the Washington Post: “Though there has been no formal announcement, the Senate Finance Committee under its new chairman, Ron Wyden (D-Ore.), expects to take up a so-called “extenders” package sometime this spring. “This is high on [Wyden’s] priority list,” according to a source with direct knowledge of the committee’s plans.”

UPDATE: February 6, 2014

Update on the current status of the mortgage forgiveness debt relief act extension that expired at the end of 2013. The last one-year extension was passed on New Years’ Day 2013 and was good through 12/31/2013. Not much has effectively happened since that time. Bi-partisan bills in both the House and Senate (H.R. 2994/S. 1187) have been offered to extend the provision for one or two years. Unfortunately, the current prospect of these bills being enacted in the short term is not particularly high. I will keep monitoring and update the situation as changes occur.

Pent Up Supply Is Slowing The Market

If the Mortgage Forgiveness Debt Relief Act truly concludes at the end of 2013, I am concerned that people will have to wait to sell their homes. While this doesn’t seem alarming, consider the fact that even with historically low mortgage interest rates, the Tallahassee real estate market is trading at about 70% of its “normal” rate.

That means only 7 out of 10 families who would normally be moving are doing so right now. This means we are in an environment where pent-up supply is growing, and we could end up with another melt-down if people stay trapped in homes that they either no longer want or perhaps they cannot afford to own.

By forgiving the income taxes on cancelled debt, Congress can make it easier for these trapped homeowners to make a move. In fact, this has exactly been the case for the past six years, and the program’s success should be reason enough to extend it for several more years. Not just for 2014, but long enough to allow home values to return to levels high enough to end the need for short sales altogether.

Please consider taking the time to reach out to your elected officials and demanding a multi-year extension to the Mortgage Forgiveness Debt Relief Act, it could have a huge impact on the economic future of our Country.

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30 March 2014
Joe Manausa
FL
Century 21
Last modified: March 30, 2014
About Joe Manausa

Joe Manausa, MBA is a 22+ year veteran of real estate brokerage in the State of Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

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Comments

  1. Margie Peterson says:

    Do you think they’ll extend thru 2014 — I’m praying they will…..

  2. Tim O'Shaughnessy says:

    I’ve emailed both my Congressman and one of my Senators in Pennsylvania to ask what is happening in Congress on any legislation to extend this Act and so far have had no response. From the Senator just an email that said ” a response will come shortly”. That was 2 weeks ago. From my Congressman, zero response. I would hope the realtor lobby groups would be pushing hard on restoring this Act. Anybody know if such efforts are being made?

  3. Yolanda Gaytan says:

    My loan was modified in 2013 and I just received a 1099-C. Why am I getting this if the Mortgage Forgiveness Debt Relief Act was still in place in 2013? How can I not include it in my income tax filing for 2013. The taxes are really going to put me in a financial bind? I read something online that says to file a 982 and put the amount in #2 and 10B. Does this sound correct?

    Thank you

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