Mortgage Debt Cancellation Relief

Overview

A lender will, on occasion, forgive some portion of a borrower's debt, or reduce the principal balance. The general tax rule that applies to any debt forgiveness is that the amount forgiven is treated as taxable income to the borrower. Some exceptions to this rule are available, but, until 2007, when a lender forgave some portion of a mortgage debt for which the borrower was personally liable (such as in so-called "short sales," foreclosures and "workouts"), the borrower was required to pay tax on the debt forgiven.

A law enacted in 2007 provided temporary relief to troubled borrowers when some portion of mortgage debt is forgiven and the mortgage covers the borrower's principal residence. That relief has expired and been extended several times. The latest extension, enacted in February 2018, provided retroactive relief for debt forgiven through December 31, 2017.

Political Advocacy

Current Legislation/Regulation (bill number or regulation)

None at this time.


In-Depth

Letters to Congress
Congressional testimonies
Issue summary
NAR Federal Issues Tracker


Legislative Contact(s):

Evan Liddiard
eliddiard@realtors.org
202-383-1083

Jamie Gregory
jgregory@realtors.org
202-383-1027

Regulatory Contact(s):

Evan Liddiard
eliddiard@realtors.org
202-383-1083

What is the fundamental issue?

A lender will, on occasion, forgive some portion of a borrower's debt, or reduce the principal balance. The general tax rule that applies to any debt forgiveness is that the amount forgiven is treated as taxable income to the borrower. Some exceptions to this rule are available, but, until 2007, when a lender forgave some portion of a mortgage debt for which the borrower was personally liable (such as in so-called "short sales," foreclosures and "workouts"), the borrower was required to pay tax on the debt forgiven.

A law enacted in 2007 provided temporary relief to troubled borrowers when some portion of mortgage debt is forgiven and the mortgage covers the borrower's principal residence. That relief has expired and been extended several times. The latest extension, enacted in February 2018, provided retroactive relief for debt forgiven through December 31, 2017.

I am a real estate professional. What does this mean for my business?

Relief from the cancellation of indebtedness rules has facilitated the sale of homes in areas where home prices have declined or where foreclosures have occurred. In addition, providing tax relief corrects the unfair circumstance in which the only individuals who paid tax on the sale of a residence are fortunate sellers who have gains of more than $250,000/$500,000, and unfortunate sellers who have seen the value of their property decline to a level below what it is worth.

Short sale relief continues to be an urgent need for sellers in certain areas of the country where home prices still have not rebounded.

NAR Policy:

NAR supports an exclusion from taxation of the phantom income generated when all or a portion of a mortgage on a primary residence is forgiven.

There should be no taxable event when a lender forgives some portion of a debt in a short sale, foreclosure, bank workout or similar situation.

An individual or family that has incurred a loss on the sale of their principal residence has suffered what is, for most, the biggest economic loss of their lifetime. It is unreasonable and unfair to require that they also pay tax on the phantom income associated with debt cancellation, especially because there will be no cash proceeds from the sale.

Legislative/Regulatory Status/Outlook

Over the past several years, expiring tax provisions often languished in Congress until after they expired. However, most were reinstated on a retroactive basis. However, since the enactment of tax reform in late 2017, the remaining expired tax provisions seem to be in a state of limbo.  Many of the larger and more prominent of these temporary tax provisions were made permanent in the Protecting American Taxpayers From Tax Hikes Act in December 2015.

Early in 2018, many in the U.S. Senate seemed willing to extend the entire remaining group of then-expired tax provisions for two more years.  However, most leaders in the House of Representatives were much less enthusiastic about extending most of these provisions.  In the end, a compromise was struck, and the group of provisions, which had expired at the end of 2016 (including the mortgage debt cancellation provision), were extended for one more year, until December 31, 2017.

Thus, the mortgage debt cancellation relief provision has already expired again, and its future beyond 2017 is very much in doubt.  The chairman of the House Ways and Means Committee, Kevin Brady (R-TX), has indicated that each of the expired provisions should be examined in 2018 to finally determine which should be made permanent and which should be allowed to remain expired.  But with few legislative vehicles available for the remainder of 2018, the chances of another extension covering 2018 and other future years is very much in doubt.

Nevertheless, this issue remains a high priority for NAR, which is actively encouraging Members of Congress to find consensus on extending this provision on a retroactive basis.

NAR Committee:

Federal Taxation Committee

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