More consumer-friendly provisions of the recently passed fiscal cliff deal that was signed into law by President Barack Obama Thursday morning keep surfacing.
Under a provision authored by Sen. Debbie Stabenow, D-Mich., underwater homeowners whose banks forgive a portion of their mortgage will not face huge new tax bills this year.
Stabenow’s Mortgage Forgiveness Tax Relief Act, which is extended for another year, stops the IRS from taxing mortgage forgiveness as income in the case of a short sale, refinancing or foreclosure, protecting families who own underwater homes and work with their lenders from being unfairly hit with an additional tax bill. The law was first signed by President George W. Bush in 2007 but set to expire at the end of 2012.
Michigan is fifth in the nation in underwater mortgages, with nearly one in three homes underwater (over 440,000 homes across the state), according to a statement released by Stabenow’s office.
“It was extremely important that Congress was able to come together to make sure families whose homes are underwater don’t get hit with a huge new tax bill they don’t deserve,” said Stabenow, in the release. “Across Michigan and across the country, many middle-class families are still working to recover from the global financial crisis that sent home values plummeting. If Congress had not included this provision, the housing market could have taken a big hit just as it is starting to turn the corner.”
Gary Thomas, president of the National Association of Realtors, said in the same statement that “Realtors are appreciative of Sen. Stabenow’s efforts to secure an extension of tax relief for forgiven mortgage debt. The extension will help many troubled borrowers who were uncertain about their future, and is vital to the nation’s recovering housing market and economy.”
Before Stabenow’s original bill was signed into law, if a family owed $150,000 on their home but could only sell it for $100,000, and the bank forgives the remaining $50,000 of the mortgage, the IRS treated this $50,000 as taxable income. “That would mean an average middle class family would have to pay an additional $12,500 in income taxes on top of their regular income taxes,” Stabenow said. Stabenow’s law “stopped this from happening for five years from 2008 through 2012, but would have expired for 2013 if it had not been extended.”