U.S. Senator Debbie Stabenow today introduced the Mortgage Relief Act to ensure that underwater homeowners, who owe more on their mortgages than their homes are now worth, would not be burdened with additional income tax if a part of their mortgage loan is forgiven. Homeowners would be required to pay these additional taxes when they refinance or sell their homes in what are commonly called "short sales."
"It is bad enough that so many families are faced with mortgages that now exceed the value of their home," said Senator Stabenow. "But to add insult to injury, without this bill, the IRS would once again require these families to pay hundreds or thousands of dollars in additional income tax when they sell or refinance their home. That's just wrong."
Declining home prices and rising foreclosure rates have forced many families to sell their homes for less than they paid for them, and sometimes for less than the outstanding debt. The IRS formerly taxed any loan forgiveness provided to homeowners as "income," meaning underwater families were paying thousands of dollars in income tax for "phantom" income that wasn't actual money the family was earning.
Senator Stabenow championed the original Mortgage Relief Act of 2007 designed to fix this problem. However, that fix expires at the end of 2012, while the problems in the housing market have not been resolved and widespread short sales and foreclosures continue. Senator Stabenow's new bill will extend this tax protection for underwater homeowners through 2015.
Approximately, twenty to twenty-five percent of American homeowners are currently underwater on their mortgages.