Harney: Congress may chop home tax provisions

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. But in 2007, as foreclosures and short sales began to explode across the country, Congress enacted a temporary exemption for home owners 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 has provided crucial relief to thousands of owners, many of whom fell behind on their loans because of job losses and medical bills. And although the total volume 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 less than their mortgage balances, according to analytics firm CoreLogic.

David Berenbaum, CEO of the Homeownership Preservation Foundation, a nonprofit group that helps financially challenged owners work out their mortgage problems, told me 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 options available to these distressed homeowners” and have “a chilling effect on short sales.”

Cassell von Baeyer, a partner in the Incline Law Group LLP in Nevada, who specializes in real estate, told me that “we still see on a daily basis” people who are working on foreclosures or short sales and face huge tax liabilities if the debt forgiveness exemption is not extended into 2017. In some cases, she said, the potential tax bills run as high as $100,000, simply because the owners will not be able to close their transactions by Dec. 31.

Congress’s failure to extend the deduction for mortgage insurance premiums would be another blow to home owners. 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 can deduct lesser amounts using a phase-down schedule.

In a letter to the Republican and Democratic leaders in both houses last week, 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 current deduction, along with mortgage debt forgiveness. On a $200,000 home, they said, moderate income buyers are now able to deduct between $600 and $1,000 using this provision — money that is often important to their family budgets.

Energy savings through home improvements are also on the chopping block. Currently owners can write off expenses on insulation, high performance windows, hot water heaters and the like with 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 year are long. Don’t bank on them for 2017.

Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.