TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, February 5, 2014

NY Times: Welcome Relief for Homeowners, Until the Tax Bill Arrives

NY Times Dealbook (2013)New York Times:  Welcome Relief for Homeowners, Until the Tax Bill Arrives, by Shaila Dewan:

Come tax time, JPMorgan Chase will be able to write off the $1.5 billion in debt relief it must give homeowners to satisfy the terms of a recent settlement.

But the homeowners who receive the help will have to treat it as taxable income, resulting in whopping tax bills for many families who have just lost their homes or only narrowly managed to keep them.

They are not alone. A tax exemption for mortgage debt forgiveness, put in place when the economy began to falter in 2007, was allowed to expire on Dec. 31, leaving hundreds of thousands of struggling homeowners in financial limbo even as the Obama administration has tried to encourage such debt write-downs.

Congress routinely allows tax breaks to expire and then reinstates them, usually retroactively, as it did last year. But the stakes are high for families dealing with large declines in their home values, and reinstatement of the tax breaks is more uncertain because of a movement in Congress to broadly overhaul the tax code, which, despite its long-shot prospects in an election year, could end up eclipsing smaller tax issues. ...

The tax exemption was intended to help homeowners who are underwater — that is, who owe more on their mortgages than their homes are worth. According to the real estate data service CoreLogic, there are still more than 6.4 million households underwater.

Typically, if someone lends you money and later says you do not have to pay it back, the I.R.S. counts the amount forgiven as income, except in cases of bankruptcy or insolvency. Short sales, in which a bank agrees to let homeowners sell their homes for less than they owe (a common way of avoiding outright foreclosure), are a form of canceled debt, as are loan modifications that reduce the amount owed.


(Hat Tip: Mike Talbert.)

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The same will tax bite happen for the recipients of loan forgiveness achieved through IBR/PAYE (err the bailout for overpriced non-elite private schools fleecing both their students and taxpayers).

Posted by: Cent Rieker | Feb 5, 2014 6:08:46 PM

For those upset with this incredibly unfair tax result (it is probably Bush's fault, anyways), can't the homeowners avoid this absurdity by simply declining the lender's offer and PAYING THEIR MORTGAGES AS THE ORIGINALLY AGREED TO???

Posted by: JSB | Feb 6, 2014 4:22:41 AM