David Foster, who sold his condo in Chicago last month, isn't plugged in to Capitol Hill's political games. But he has banked the financial future of his family on
Like thousands of other owners across the country who have been struggling with underwater properties, Foster, a 33-year-old campus pastor with a local ministry group, knew he was taking a risk when he negotiated the short sale and debt cancellation. In a short sale, the lender allows a new purchaser to buy a house at a price below the mortgage amount owed by the seller. As part of the deal, the lender typically forgives the unpaid balance.
The risk Foster took was this: If the Senate and House do not pass an extension of the mortgage debt relief law during the lame-duck session, the full principal balance his lender wrote off on his mortgage probably will be treated as ordinary income for 2014. Although Foster never received a dollar of that "income" in his wallet, under the federal tax code he'll owe a tax payment to the government — $28,000 — on the $100,000 his lender wrote off.
"I don't know how or where we could come up with that," Foster told me. "I can't believe anyone would think this is a reasonable thing to do" — hit underwater home sellers with heavy tax bills while they're still struggling to recover from their own financial crises.
That is precisely the issue now before the House and Senate — whether to extend for one more year a temporary tax relief provision expressly designed for homeowners such as Foster. It took effect in 2007 as foreclosures began to mount across the country and millions of people fell behind on mortgage payments. Then came the bust in 2008. Then the Great Recession, which hasn't really ended for many families.
The mortgage debt relief law expired Dec. 31, along with other special-interest tax breaks that usually would have been renewed as a package. That process broke down last year, however, leaving people who have received principal debt reductions during 2014 — whether through short sales, loan modifications or foreclosures — twisting in tax limbo.
In Foster's case, a condo he purchased for $202,000 in May 2008 began to plunge in value almost immediately, as did many others in the greater Chicago area. By the time of his short sale last month, the bank concluded the most it could get for the condo was $50,000, which an investor agreed to pay. Yet Foster's remaining loan balance was about $150,000, two-thirds of which the bank wrote off.
Last summer, the mortgage debt relief extension appeared to be moving ahead in the Senate. In a bipartisan vote, the Finance Committee approved what became known as the EXPIRE Act. Along with a package of other short-term tax benefits, the bill extended the mortgage debt relief provisions through December 2015.
So here we are. Reid has indicated that the extenders bill should get a vote. Most Capitol Hill experts say there's a good chance the bill will pass.
On the House side, the outlook is muddier. Rep.
Where's this headed? No one can yet say for sure, but Alexis Eldorrado, the Chicago realty broker who helped Foster accomplish his short sale, says Congress needs to find a way to do the right thing for thousands of financially pressed owners. To fail to pass one more extension, she says, "would be unconscionable."