NEW
YORK (CNNMoney) -- The clock is ticking on a tax break that saves struggling homeowners from
paying thousands of dollars to the IRS.
If
the Mortgage Forgiveness Debt Relief Act of 2007 does not get extended by
Congress by the end of the year, homeowners will have to start paying income
taxes on the portion of their mortgage that is forgiven in a foreclosure, short
sale or principal reduction.
So
if you owe $150,000 on your home and it sells for $100,000 in a foreclosure
auction, the IRS could tax you on the remaining $50,000. For someone in the 25%
tax bracket, that would mean paying $12,500 in taxes on the foreclosure.
Similar taxes would apply for forgiven amounts in short sales and principal
reductions.
"People
trying to do short sales are freaked out about it," said Elizabeth
Weintraub, a real estate agent in Sacramento, Calif. "They're telling me
they'll do whatever it takes to close by the end of the year."
Should
the tax break expire, a large number of mortgage borrowers could be affected.
More than 50,000 homeowners go through foreclosure each month. Meanwhile, the number of short
sales has tripled over the
past three years to a rate of about half a million a year. And, under the terms of the $25 billion foreclosure
abuse settlement, roughly one million
borrowers may have their mortgage debt lowered through principal reductions
over the next couple of years.
"If
there ever was a no-brainer in housing policy, this would be it," said
Jaret Seiberg, a policy analyst for Guggenheim Securities.
Yet,
Seiberg is skeptical the exemption will get extended. Now that the election is
over, he thinks Congress will be heading into a "lame duck" session,
with very little legislation moving forward through the end of the year.
In
addition, the cost of the exemption could make it a point of contention, he
said. The office of Sen. Max Baucus, who heads the finance committee, estimated
the cost of a one-year extension at $1.3 billion.
The end of the year is fast approaching. Now what?
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