U.S. Senators Dean Heller (R-NV) and Debbie Stabenow (D-MI) 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 soaked 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." The legislation is also cosponsored by Senators Robert Menendez (D-NJ), Sherrod Brown (D-OH) and Jeff Merkley (D-OR).
"As the nation's leader in foreclosures, no state understands the consequences of falling home values more than Nevada," said Senator Heller. "Thousands of Nevadans who are underwater in their homes and have received financial relief for their mortgage would be hit with a tax bill if Congress does not act this year. It makes little sense to tax people on income they never received. As we work to get our nation's economy back on track, Congress must provide solutions that help those who are struggling in this current housing market."
"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.
The mortgage relief 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. Heller and Stabenow's new bill would extend this tax protection for underwater homeowners through 2015.
Approximately, 20-25 percent of American homeowners are currently underwater on their mortgages.