For many, this year’s tax season could dampen the prospects of that fresh start and those financial resolutions to save more and spend less. As of December 31st 2013 the Mortgage Debt Relief Act and Debt Cancellation of 2007 has expired.
The Federal Debt Relief act was put into place to “allow taxpayers to exclude income from the discharge of debt on their principle residence”. This debt relief created a bit of a softer landing from the financial burden of equity and job loss as a result of the Great Recession. With America’s economy improving and home values coming back this session’s Congress didn’t take the necessary steps to renew the Mortgage Debt Relief Act for 2014. 
How does The Federal Debt Relief Act Work?
Homeowners who owned more money on their mortgage than their home is appraised for have the option to negotiate a sales price with their lender through short-sale. A short-sale is when a bank allows the homeowner to sell the property for less than is owned on the mortgage. This difference between what the bank approved sales price through the shore sale is and what is owned on the mortgage would be considered income for the homeowner and therefore subject to tax based on the individual’s specific tax bracket.
Short Sale Example:
Johnny Homeowner owes $200,000 on his mortgage with Acme Mortgage Co., but his home is only appraised at $150,000. Acme Mortgage Co. grants Mr. Homeowner a short sale at $150,000. Johnny Homeowner will be required to pay taxes on that $50,000 difference based on his taxable earnings bracket. Under the Federal Debt Relief Act, Mr. Homeowner would not have to pay taxes on that $50,000, now with the expiration of the Act, Johnny is back on the hook and will have some potentially large tax liabilities for his next filing year.
The Argument:
It’s true that the housing market is on the rebound and homeowners are recovering much of their equity lost from the credit crisis, but just because we are out of the woods doesn’t mean people are not still struggling. The unemployment rate maybe dropping but the job rate participation is at the lowest point since 1978. According to the Bureau of Labor Statistics there are 91.8 million eligible Americans not currently participating in the work force.
Mortgage Buddy Opinion- We need to jump start the economy without flooding it with more fed liquidity and that comes through more the natural expansion of GDP. Americans can’t buy goods if they are paying large tax bills, and if they aren’t spending the private sector can’t expand and create more jobs. There is difference between a government handout and a supportive government.
It’s true that many Americans bought homes they couldn’t afford and may have maxed out the tangible equity, but there are millions who lost their jobs from no fault of their own and technology makes our life easier and businesses more efficient but it’s that efficiency that keeps companies from needing to hire. The Mortgage Debt Relief Act still makes sense for primary residences and hopefully Congress will work together to make this program available.
This Post is “Mortgage Buddy Approved”
