Congress should not reinstate the tax break on forgiven debt
Activists plead for reinstatement of the tax break on forgiven debt that expired at the end of last year. The value of the forgiven debt is now taxed as income — as it should be.
Congress likes to provide tax breaks and subsidies to encourage certain activities and dissuade others. There is a simple truth about taxes: any activity that is taxed will diminish, and any activity that is subsidized will increase. Do we want to see more more irresponsible borrowing? If so, then we should forgive debts and fail to tax the free money as income. That’s what some activists are proposing. I believe forgiven debt should be taxed, particularly on mortgage equity withdrawal.
Did borrowers deserve a tax break on forgiven debt?
The tax break on forgiven debt was arguably a political necessity in 2007. Many innocent borrowers bought near the peak of the housing bubble simply due to their bad timing. Those borrowers who sold short on their purchase-money mortgages deserved a tax break; punishing them serves no public purpose, which explains why California gives those borrowers non-recourse status. However, the tax break was doled out to many who didn’t deserve it; Ponzis and HELOC abusers should pay taxes on the forgiven debt because those borrowers used the borrowed money as tax-free income. If legislators reconsider the expiration of this tax break, they should limit its application only to amounts less than the borrower’s original purchase-money mortgage. All mortgage equity withdrawal should be taxed as income. Better yet, this tax break should be allowed to die.
By SHAILA DEWANFEB. 4, 2014
… A tax exemption for mortgage debt forgiveness, put in place when the economy began to falter in 2007, was allowed to expire on Dec. 31, leaving hundreds of thousands of struggling homeowners in financial limbo even as the Obama administration has tried to encourage such debt write-downs.
Congress routinely allows tax breaks to expire and then reinstates them, usually retroactively, as it did last year. But the stakes are high for families dealing with large declines in their home values, and reinstatement of the tax breaks is more uncertain because of a movement in Congress to broadly overhaul the tax code, which, despite its long-shot prospects in an election year, could end up eclipsing smaller tax issues.
“Frankly, I’m worried because this should have gotten done before the end of the year and we’ve got families that have to make decisions now,” said Senator Debbie Stabenow, Democrat of Michigan, who is the sponsor of a bill that would extend the mortgage tax break. …
People had six years to make a short sale. If they failed to act in a window of opportunity open that long, they have nobody to blame but themselves.
Typically, if someone lends you money and later says you do not have to pay it back, the I.R.S. counts the amount forgiven as income, except in cases of bankruptcy or insolvency.
Short sales, in which a bank agrees to let homeowners sell their homes for less than they owe (a common way of avoiding outright foreclosure), are a form of canceled debt, as are loan modifications that reduce the amount owed.
Reduced debt should be taxed as income. The person receiving the benefit of debt forgiveness gains while others do not, and this benefit is just as valuable as income; in the case of HELOC abusers, the mortgage money was extracted and spent just like income.
Also, did you notice the reporter added the nonsense about avoiding foreclosure? She did that to make short sales seem like a great activity that should be rewarded. Perhaps it would be better to ask the borrower to continue making payments in accordance with their promissory note? No, we can’t encourage people to be responsible, can we?
Loss of the exemption is a financial body blow to homeowners already struggling to make ends meet. “I’m in a hole here — I’m trying to work my way out,’” said Eric Heil, 50, a hospital imaging technician who said a divorce and reduced income were forcing him to sell the house he has owned for 18 years in Parma, Ohio. “And the government’s going to say you have to pay taxes on it?”
Mr. Heil owes $250,000 on his mortgage, and has found a buyer willing to take the house for $150,000.
How much did this guy pay for his house in Parma, Ohio, 18 years ago? I bet it was quite a bit less than $250,000, particularly if it’s only worth $150,000 today. He is a HELOC abuser; for him the mortgage equity withdrawal was income, a lot of income, in fact. Is this the best person the reporter could find to be her victim to arouse sympathy in this story?
Is this what we want to encourage with tax breaks? Renters over the last 18 years didn’t have access to hundreds of thousands of dollars in free mortgage money. Prudent homeowners had access to the free money but didn’t take it. Why shouold renters as well as prudent homeowners pay the bills of irresponsible HELOC abusing Ponzis through their taxes? That’s bullshit!
The bank has agreed. But if Congress does not extend the exemption, he will be forced to count the $100,000 difference as income. That would mean a $28,000 tax bill, and Mr. Heil has no idea how he would afford it.
The number of people using the mortgage debt relief exemption has increased every year, reaching almost 100,000 in 2011, the most recent year for which the I.R.S. has figures. That number could be far greater in 2013, when there were more than a quarter-million short sales, according to Daren Blomquist of RealtyTrac, who estimates that those families received an average debt reduction of roughly $37,000. If the exemption had not been in place, that would have translated to an extra $9,250 tax bill for those in the 25 percent bracket. …
Debt reduction was slow to take off as a tool for preventing foreclosure, but as it has proved to be among the most effective types of loan modification, loan servicers have grown more open to using it.
Moreover, while the acting director of the Federal Housing Finance Administration forbade the use of principal reduction on mortgages overseen by Fannie Mae and Freddie Mac, even though it would have saved those entities money, the recent appointment of a permanent director, Mel Watt, has raised the possibility that the ban will be lifted.
“We’re finally hitting the sweet spot of principal reduction and mortgage resizing, and all of a sudden the tax relief sunsets,” said Lou Tisler, executive director of Neighborhood Housing Services of Greater Cleveland, which helped Mr. Heil with his case. Clients now have to be warned that Congress may not reinstate the exemption, Mr. Tisler said.
“It’s certainly not a giveaway to anybody, it’s not going to grow into some kind of entitlement — in fact, it’s going to shrink as time goes by,” he said. “These are the people who have tried the hardest to hang on to their homes and keep the economy strong.”
It’s not a giveaway to anybody? WTF? And what is the bullcrap about keeping the economy strong? Is that an appeal to patriotism? We should take one for the team? These people have no shame; looters never do.
The bill may suffer from a general fatigue over homeowner issues or a belief that the Treasury cannot afford to forgo the revenue. (The provision is estimated to cost the government $1.3 billion a year in tax revenues; by comparison, the mortgage interest deduction for homeowners is worth $70 billion a year.)
What does the relative cost of the HMID have to do with anything? The reporter put that in there to make the cost of extending this tax break seem modest and reasonable when it’s an unwarranted giveaway, a looting of the national treasury by those who least deserve it.
There may also be a sense that the exemption is no longer urgent because the economy, and the housing market, are improving.
There was never a sense that the exemption was needed except in the minds of mortgage equity withdrawal looters who wanted their free money to be completely free. The fact that rising prices may bail these people out will probably prompt Congress to let this tax break expire. The pump-and-dump the guys in Washington orchestrated saved the banks, and if a few small fry obtain some benefit, that’s a bonus. Congress may do the right thing for the wrong reasons, but as long as the tax break is dead, we should all be happy the looters won’t gain access to the treasury.
212 South KRAEMER Blvd #611 Placentia, CA 92870
$209,900 …….. Asking Price
$68,500 ………. Purchase Price
8/30/1999 ………. Purchase Date
$141,400 ………. Gross Gain (Loss)
($16,792) ………… Commissions and Costs at 8%
$124,608 ………. Net Gain (Loss)
206.4% ………. Gross Percent Change
181.9% ………. Net Percent Change
7.8% ………… Annual Appreciation
Cost of Home Ownership
$209,900 …….. Asking Price
$7,347 ………… 3.5% Down FHA Financing
4.29% …………. Mortgage Interest Rate
30 ……………… Number of Years
$202,554 …….. Mortgage
$65,021 ………. Income Requirement
$1,001 ………… Monthly Mortgage Payment
$182 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$44 ………… Homeowners Insurance at 0.25%
$228 ………… Private Mortgage Insurance
$225 ………… Homeowners Association Fees
$1,680 ………. Monthly Cash Outlays
($47) ………. Tax Savings
($277) ………. Principal Amortization
$11 ………….. Opportunity Cost of Down Payment
$46 ………….. Maintenance and Replacement Reserves
$1,413 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$3,599 ………… Furnishing and Move-In Costs at 1% + $1,500
$3,599 ………… Closing Costs at 1% + $1,500
$2,026 ………… Interest Points at 1%
$7,347 ………… Down Payment
$16,570 ………. Total Cash Costs
$21,600 ………. Emergency Cash Reserves
$38,170 ………. Total Savings Needed