Fiscal Cliff Senate Bill Includes Help For Troubled Homeowners

By Zach Carter
Huffington Post, January 1, 2013

WASHINGTON — The Senate version of the legislation to avert the so-called fiscal cliff is littered with favors for select corporations. But it also includes a prime provision for troubled homeowners who receive mortgage relief from their banks.

Without the special clause, the limited foreclosure relief efforts that are currently in the works would be extinguished. Banks have been extremely reluctant to grant families debt relief on mortgages facing foreclosure. But tax policy is poised to poison any debt relief that borrowers could receive from banks — unless Congress acts.

Millions of homes are worth far less today than what buyers paid for them during the housing bubble. Banks can often save money for themselves and investors by writing down the value of a troubled mortgage to the current value of the house — thus averting costly foreclosure expenses. At midnight on January 1, 2013, the tax policy for this relief changed. Any debt that banks forgave would be counted as ordinary, taxable income for the borrower. If a $300,000 mortgage is written down to a $200,000 current home value, the homeowner is suddenly burdened with a tax bill for $100,000 in income.

As a result, a homeowner struggling to pay the bills would be faced with tens of thousands of dollars in taxes. That would destroy any hope of establishing future mortgage debt relief for troubled homeowners, as any bank leniency would result in heavy tax trauma for borrowers.

But the Senate version of the fiscal cliff bill would delay this tax policy change for a year. If the deal passes the House, the few mortgage modifications that are currently in the works will be able to proceed.

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  1. Jerilyn Bodemar

    I don’t understand this article . .
    Can you clarify?

    Having a $100,000 mortgage reduction
    result in taxes on that same amount
    sounds bad, yet the last sentences confuse.
    And certainly a paltry one year delay
    by the Senate is quite meaningless. . .

    Thanks for any light you can shed.

    1. Post author

      My understanding is that the tax law was going to treat the mortgage reduction as income that someone would have to pay taxes on, but the fiscal cliff agreement delayed that requirement for a year so no taxes would be owed.

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