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In Washington, much of the political conversation these days surrounds a "fiscal cliff" of tax increases and drastic budget cuts that could ignite another economic recession if lawmakers don’t reach a compromise on such issues before this year ends.
One organization, though, recently raised its concerns about another piece of federal legislation and its potential impact on many American homeowners if Congress doesn’t act before Dec. 31.
The National Association of Realtors posted an item on its Realtor Party webpage with a "Call for Action" about a law set to expire this year. A PolitiFact Georgia follower on Twitter asked us to check out the accuracy of the information.
"Congress will soon return to Washington with unfinished business to complete. One of those items is a housing issue that could affect almost one-quarter of all real estate transactions -- the expiration of Mortgage Forgiveness Tax Relief," the webpage says.
"Without action before the end of the year, millions of families who hold distressed properties could face a hefty tax bill for trying to modify their mortgage or to seek a short sale through their lender. Even those facing foreclosure will find themselves forced to pay a ‘foreclosure tax’ if Congress doesn’t act."
Walter Molony, a spokesman for the association, said "distressed properties" is a reference to homeowners who owe more on their loans than the property is worth. As for a "foreclosure tax," Molony said that "is our term of art to highlight that a family would face income tax on the amount of the loan forgiven after a foreclosure."
In late 2007, Congress passed the Mortgage Forgiveness Debt Relief Act to help the rising number of homeowners whose finances were being demolished by foreclosures. The act prevents homeowners from being taxed for the cancellation of any debt by a lender during a loan modification or foreclosure. The federal act applies for the years 2007 through 2012.
The Internal Revenue Service’s website offers an example of how it works:
"You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you."
If the cancellation of debt is $100,000, a borrower could be taxed on that amount.
Generally, the debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify, the IRS says.
The maximum amount of debt a homeowner can claim is $2 million or $1 million if you’re filing a tax return as a single payer. IRS spokesman Mark Green stressed that point with PolitiFact Georgia, since it was not mentioned in the "Call for Action."
In 2011, the estimated tax savings to borrowers from the exemption was at least $1 billion, The New York Times reported, quoting calculations by the association.
Some estimates show short sales account for 20 percent to 25 percent of all homes sold in recent months across the country. Slightly more than 4 percent of U.S. homes were in foreclosure, according to a Bloomberg article published in August.
It’s unclear whether Congress will pass any legislation to extend the act. Some National Association of Realtors officials believe Congress will pass an extension at the last minute. A one-year extension would cost the federal government about $1.3 billion, according to some estimates.
Let’s recap. The National Association of Realtors wrote that millions of Americans could face a hefty tax bill if Congress does not extend this act. It’s possible, if the Mortgage Forgiveness Debt Relief Act isn’t extended. The Realtors’ estimate that it could have an impact on one-quarter of transactions seems on target, if you add up the percentage of homes in foreclosure and short sales. The association’s "Call for Action" could have used the additional detail about the amount of debt borrowers could write off. We rate this claim Mostly True.
National Association of Realtors, "Call for Action: Keep the Housing Recovery on Track."
Bloomberg, "U.S. Mortgage Delinquencies Rise for First Time in Year," Aug. 9, 2012.
Email from Walter Molony, spokesman, National Association of Realtors, Nov. 26, 2012.
Fox Business News, "Short-Sellers: Act Now or Face A Big Tax Bill," Oct. 5, 2012.
Internal Revenue Service, "The Mortgage Forgiveness Debt Relief Act," last updated Aug. 3, 2012.
Los Angeles Times, "Tax relief on mortgage debt forgiveness ends in 2013, so hurry," Jan. 29, 2012.
Telephone interview with Mark Green, spokesman, Internal Revenue Service, Nov. 20, 2012
The New York Times, "End Is Nigh for Certain Tax Exemptions," Oct. 18, 2012.
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