U.S. Senators Debbie Stabenow (D-MI) and Dean Heller (R-NV) today introduced the Mortgage Forgiveness Tax Relief Act to ensure that underwater homeowners, those who owe more on their mortgages than their homes are now worth, would not be hit with additional income tax if a portion of their mortgage is forgiven. Without the Stabenow-Heller legislation, homeowners will 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 bipartisan 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."
"If Congress does not act this year, then thousands of Nevadans who are underwater in their homes will be forced to pay a tax at a time when what they need is some relief. This legislation is a common sense approach that will prevent Nevadans from being taxed on income they never received. I look forward to continuing to work with Senator Stabenow to extend this critical tax relief as the Silver State continues to work towards recovery," said Senator Dean Heller.
"The housing market is rebounding, but returning to the practice of unfairly taxing underwater homeowners would undermine that progress," said National Association of Realtors' 2012 Regional Vice President Furhad Waquad. "Especially in Michigan, this legislation will help troubled borrowers who are being responsible and working with their lenders to find solutions. Sen. Stabenow's bill is critical to the nation's recovering economy and we appreciate her leadership on this issue."
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 had earned.
Senator Stabenow championed the original legislation that protected homeowners from having mortgage relief taxed as income in 2007. However, that legislation expired at the end of 2012. Stabenow and Heller introduced legislation last year that continued this protection for homeowners through the end of 2013. Stabenow and Heller's new bill will extend the current moratorium on taxing mortgage forgiveness through 2015.
While the housing market is beginning to recover, short sales and foreclosures continue. Approximately one-in-five American homeowners are currently underwater on their mortgages.