Efforts to pass a tax extension bill that ensures troubled homeowners are not penalized when they receive debt relief in the form of mortgage forgiveness has come to standstill due to an impasse in Washington over the government spending and taxes.

In August, the Senate Finance Committee approved a bill that extends 27 tax provisions that are due to expire Jan. 1. The Senate bill ensures any mortgage debt that is forgiven in a short sale (or loan modification) is not taxed as ordinary income.

But the tax writers on the House Ways & Means Committee have not acted yet. And House Ways and Means Committee chairman David Camp, R-Mich., won’t take up the tax extension bill until congressional Republicans reach a deal with President Obama on taxes and spending.   

“The  committee continues to review the extenders and the chairman has stated that he does not expect any decision on particular provisions or an overall package until we resolve the fiscal cliff negotiations,” a Ways and Means Committee spokesperson said.

Failure to pass the mortgage debt forgiveness provision by Jan. 1 could cause uncertainty for homeowners that would benefit from debt forgiveness.  

Under the $25 billion National Mortgage Settlement, borrowers are obtaining loan modifications with principal reductions averaging $105,000. That amount of principal reduction can push a troubled homeowner borrower into a higher tax bracket where they end up owing the IRS at least $35,000.

Congress needs to pass a tax extension bill soon to avoid having a “chilling effect on short sales and loan workouts that include principal writedowns,” said Scott Talbott, the chief lobbyist for the Financial Services Roundtable.

In the third quarter, servicers completed over 110,000 short sales.

Subscribe Now

Authoritative analysis and perspective for every segment of the mortgage industry

30-Day Free Trial

Authoritative analysis and perspective for every segment of the mortgage industry