Congress has left unrenewed The Mortgage Forgiveness Debt Relief Act of 2007 created to help distressed homeowners; that were faced with taxes after a Principal reduction. Under current federal tax law, when the homeowners accept reductions in what they owe, the amount forgiven by the bank gets reported to the IRS, and the owner is hit with taxes as if it were ordinary income.
Without Congressional action to renew the breaks, those whom banks allowed to sell their homes for less than the amount of their mortgage would have to pay taxes on the forgiven mortgage debt as if it were income, and it will hit hard on homeowners with a massive tax bills. This Congressional inaction could add $75K in phantom income.
RealtyTrac estimates that in the first three-quarters of 2014, there have been more than 170,000 short sales representing a mortgage debt forgiveness of $8.1 billion total. The average short sale has a mortgage forgiveness of about $75,000, which if the tax break expires would be counted as income.
If Congress does not extend the law retroactively thousands of underwater homeowners could be hit with tax burdens that may not be able to handle.