Next week, homeowners who are “underwater” on their mortgages and have received relief from their banks may face tax increases if Congress does not extend a law that provides relief.
Homeowners who are “underwater” or have negative equity in their homes can negotiate with their banks to get their mortgage balance reduced or be able to sell their homes for less than they owe. When either occurs, however, “the difference between what the homeowner owes and the lower sales price approved by the bank is considered income for the homeowner and subject to tax by the Internal Revenue Service.”
As the Washington Post notes, “the Mortgage Forgiveness Debt Relief Act saved such homeowners from the tax burden,” and Congress extended the law last year through the end of 2013. There are reportedly “more than 6 million homes still underwater across the country,” which is down from 11 million in 2009.
States like Maryland, which reportedly has 214,000 homes with negative equity, will “extend a measure exempting its residents from state taxes even if the federal law expires.” Virginia and Washington, D.C. do not have such measures.
The Post notes that there are currently three bills in Congress that call for the law’s extension.