Unless Congress comes together by January 1 to renew a 2007 tax exemption on mortgage debt forgiven by a lender, the financial stress placed on borrowers could undercut other federal efforts to get the housing market back on track, according to the New York Times.
The Mortgage Forgiveness Debt Relief Act of 2007 exempts canceled mortgage debt used to buy, build or improve a primary residence up to $2 million from federal taxation. Meaning that a borrower does not need to pay taxes on a reduction in principal owed on a loan, or a write-off in the amount owed after a short sale, according to the Times.
But if the exemption is not renewed — which experts believe is possible – the financial burden placed on distressed borrowers could cancel out other government relief efforts, such as a $25 billion deal that forces big banks to forgive more mortgage debt as a penalty for mishandling mortgage documents.
“I’m optimistic in the sense that everyone agrees on the merits of the issue and that it’s good for the market,” Jamie Gregory, the deputy chief lobbyist for the National Association of Realtors, which is pushing for the exemption’s renewal, said. “My only caution is the process.”
According to the Realtors association, the exemption saved borrowers an estimated $1 billion in taxes in 2011.
New York and New Jersey could be hit particularly hard if the tax break is not renewed because of the states’ large backlog of foreclosures, according to Michael Litzner, the owner/broker of Century 21 American Homes. The average length of the foreclosure process in New York was 1,072 days in the third quarter, compared to the national average of 382 days. [NYT] —Christopher Cameron