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Bill to limit foreclosure taxes

By Kay Bell · Bankrate.com
Thursday, March 29, 2012
Posted: 1 pm ET

The bursting housing bubble still has some fizz. The federal government and 49 state attorneys general recently reached a $25 billion settlement with mortgage lenders over alleged foreclosure abuses that helped contribute to the current housing crisis.

Now some U.S. representatives want to make sure that the deal doesn't produce tax problems for the folks the agreement was designed to help.

The agreement with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial would resolve numerous federal and state law home loan violations, such as fake documentation and robosigning, in connection with homes that were sold or foreclosed upon between Jan. 1, 2008, and Dec. 31, 2011.

The deal also would establish a $20 billion fund from which affected homeowners would receive payments.

But under current tax law, those cash payments as well as forgiven home debt would be taxable income to the former homeowners. Taxes also would be owed on payments made to military personnel who were wrongfully foreclosed on while deployed overseas.

The authors of the Homeowners Tax Fairness Act say their bill would eliminate these tax burdens. The measure would extend the exclusion for debt forgiveness on a primary residence throughout the term of the settlement agreement and exclude the relief payments from income for homeowners and servicemembers.

The bill's primary sponsors are Reps. Jim McDermott of Washington, John Larson of Connecticut and Shelley Berkley of Nevada. All are Democrats and serve on the tax-writing Ways and Means Committee.

"Collecting federal income tax on relief intended for struggling homeowners is not only bad policy, but is simply wrong," said McDermott in a statement announcing the bill's introduction.

The bill would also extend the deduction for mortgage insurance for three years, as well prevent the banks from being able to deduct the home-loan related payments from their federal corporate income taxes.

I'm glad these banks are getting whacked for their at best sloppy and at worst criminal acts in connection with home loans.

And I feel for folks who've lost their homes in part to the bad practices of lenders. Getting hit with a tax bill on top of losing a home is the ultimate insult to injury.

But to be honest, I am tired of all the legislation proposed and/or enacted in recent years connection with the housing debacle. The biggest offender in this regard was the first-time homebuyer credit, ostensibly created to keep the housing sector afloat at the outset of the housing crisis. What we got was a handful of new homeowners and a whole lot of tax confusion and frustration on the parts of buyers, the IRS and taxpayers footing the bill.

Despite being compassionate and well-intentioned, I feel that every measure also prolongs the inevitable, which is to let the system finally work itself out, for better or, sadly for some, worse.

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2 Comments
Kay Bell
March 29, 2012 at 4:06 pm

It's true that foreclosure debt relief is in effect in some instances through 2012. But there's no guarantee Congress will continue this tax measure beyond this year so, as noted, this measure would extend foreclosure relief in the case of the settlement related actions.

jeremy
March 29, 2012 at 3:41 pm

Morgage forgiveness is already non-taxable per the IRS website.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

"The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012."