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Monday, Dec 22, 2014
Editorials

Don’t slap vulnerable homeowners with hefty tax

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Members of Congress should heed the advice of Florida Attorney General Pam Bondi and 41 other attorneys general and extend the Mortgage Debt Relief Act, scheduled to expire Tuesday.

Without the act, financially strapped homeowners will be slapped with heavy tax bills, making defaults or foreclosures more likely.

The Mortgage Debt Relief Act, originally adopted in 2007, was designed to allow borrowers to avoid paying income taxes on the amount of principal that is being forgiven during a loan modification or a short sale.

The law was set to expire last year but was extended a year.

If the law lapses, homeowners will have to pay taxes on the debt reduction as though it were actual income. This is unfair and shortsighted. It will hurt Americans who can least afford the tax penalty and undermine the housing market’s sluggish recovery.

The impact of the law can be seen in the illustration we made last year when endorsing the law’s extension: An individual buys a home for $150,000, sees the economy tank, loses his job and faces foreclosure. He manages a short sale of the house for $80,000. Without the tax relief act, he would be taxed on the $70,000 debt that is being forgiven, exactly as though it were personal income.

The tax also would be levied should the bank modify the loan, reducing the principal so the homeowner could manage payments.

The law’s exclusion only applies to primary residences, not second homes. This is no bailout for speculators.

It is true the housing market has improved in the past year, but the recovery is far from complete.

As Bondi and her fellow attorneys general wrote to Congress, “The housing market is still fragile, and the recovery is expected to slow in the next few months with declines in prices in some areas. An estimated 7.1 million homes with mortgages, or 14.5 percent nationally, are still in negative equity, with rates of 20 to 36 percent in hardest hit areas, meaning that these homeowners owe more on their properties than the property is worth. Similarly, foreclosure rates and home repossessions are improving but are still too high in many places.”

Penalizing citizens who are desperately trying to regain their financial footing is no way to help the economy. Congress should extend the Mortgage Debt Relief Act for another year.

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