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 home improvements abruptly vanish?
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 plans to extend expiring tax code provisions such as 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 and other improvements.
All three benefits terminate Dec. 31. Unlike previous years, when Congress extended them, this year is different. There is strong sentiment, especially in the House, that a comprehensive overhaul and simplification of the tax code should be the priority, rather than 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 unable to complete short sales, loan modifications or foreclosures before year-end. Many of them could face crushing tax demands from the IRS — or be forced to declare insolvency or file for 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. But in 2007, as foreclosures and short sales began 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.