Could it be a grim and grinchy December for thousands of homeowners facing ongoing challenges with their mortgage payments and property values? Could popular deductions for mortgage insurance premiums and energy-efficient renovations abruptly vanish?
Congress may very well be homeowners Grinch this Christmas
That’s the way things are shaping up in the closing weeks of the post-election lame duck congressional session. Republicans controlling the tax-writing committees in the House and Senate say they have no intentions to extend expiring tax code provisions like mortgage debt forgiveness for financially troubled owners, mortgage insurance write-offs used by moderate-income first-time buyers, and deductions for purchases of energy-saving windows, insulation as well as other improvements.
All three benefits terminate Dec. 31. Unlike previous years when Congress extended them, this current year is different. There exists strong sentiment, especially in the House, that a comprehensive overhaul and simplification of the tax code should be the priority, as opposed to piecemeal, end-of-the-year extensions of special interest provisions that complicate that objective.
The failure to pass so-called “extenders” would be especially painful for large numbers of underwater owners who are not able to complete short sales, home loan modifications or foreclosures before year-end. Most of them could face crushing tax demands from the IRS, or be forced to declare insolvency or declare bankruptcy.
Under the federal tax code, when a creditor cancels a taxpayer’s debt, the IRS treats the amount forgiven as income, taxable at ordinary rates. However in 2007, as foreclosures and short sales started to explode across the country, Congress enacted a temporary exemption for homeowners who received cancellations of mortgage debt as part of their loan modification deals with lenders. That exception has been extended periodically by Congress ever since.
Over the years it’s provided crucial relief to thousands of owners, the majority of whom fell behind on their loans because of job losses and medical bills. And even though the total number of short sales and foreclosures has declined since the height of the Great Recession, 3.6 million owners nationwide remained underwater as of mid-year – their home values were lower than their mortgage balances, as outlined by analytics firm CoreLogic.
David Berenbaum, CEO of the Homeownership Preservation Foundation, a nonprofit group that helps financially challenged owners work out their mortgage problems, expressed that his group is expecting 300,000 “hotline” calls for help from troubled owners in 2017, and that fully one-quarter of them are underwater. In Maryland, Illinois and New Jersey, 40 percent of owners requesting help remain underwater, he said.
In a letter to Sen. Johnny Isakson (R-GA), a member of the tax-writing Finance Committee, Berenbaum said “failure to extend the mortgage debt forgiveness tax provisions will reduce the available options to these distressed homeowners” and have “a chilling effect on short sales.”
Congress’s failure to extend the deduction for mortgage insurance premiums would be another blow to homeowners. Under current rules, married owners filing jointly with adjusted gross incomes no higher than $100,000 ($50,000 for single filers) can write off mortgage insurance premiums they pay on their loans. On incomes up to $109,000 ($54,500 filing singly) they are able to deduct lesser amounts using a phase-down schedule.
In a letter to the Republican and Democratic leaders in both houses a week ago, three major trade groups – the Mortgage Bankers Association, the National Association of Home Builders and the National Association of Realtors – called for retention of the present deduction, as well as mortgage debt forgiveness. On a $200,000 home, they said, moderate-income buyers are now able to deduct between $600 and $1,000 applying this provision, money that is often crucial to their family budgets.
Energy savings through home improvements also are on the chopping block. Currently owners can write off expenses on insulation, high performance windows, hot water heaters and the like using a $500 lifetime cap. Come Jan. 1, they won’t.
Bottom line: The outlook is dim for all three of these popular tax benefits. Though December legislative miracles happen, the odds this current year are long. Don’t bank on them for 2017.
As always we would recommend checking the IRS website for updates and notifications. You do not want to be scammed or taken advantage of. Nick & Cindy Davis are both Certified Distressed Property Experts (CDPE) and Short Sale Foreclosure Resource Certified (SFR). We have assisted over 225 families negotiate Short Sales for their homes. We do not charge any “Loss Mitigation Negotiation Fees” If you are in need of our services, we are always just a call to 813-300-7116 or simply click here and we will be in touch.