President Obama Signs Sen. Stabenows Mortgage Forgiveness Law, Included in Fiscal Cliff Agreement
Stabenows Provision Stops IRS from Taxing Mortgage Forgiveness as Income
Underwater homeowners whose banks forgive a portion of their mortgage will not face huge new tax bills this year, thanks to a provision authored by U.S. Senator Debbie Stabenow that the president signed today as part of compromise legislation to avoid the "fiscal cliff."
Stabenow's Mortgage Forgiveness Tax Relief Act stops the IRS from taxing mortgage forgiveness as income in the case of a short sale, refinancing or foreclosure, protecting families who own underwater homes and work with their lenders from being unfairly hit with an additional tax bill. The law was first signed by President Bush in 2007 but set to expire at the end of 2012.
Michigan is fifth in the nation in underwater mortgages, with nearly one in three homes underwater (over 440,000 homes across the state).
"It was extremely important that Congress was able to come together to make sure families whose homes are underwater don't get hit with a huge tax bill they don't deserve," said Stabenow. "Across Michigan and across the country, many middle-class families are still working to recover from the global financial crisis that sent home values plummeting. If Congress had not included this provision, the housing market could have taken a big hit just as it is starting to turn the corner."
"Realtors are appreciative of Sen. Stabenow's efforts to secure an extension of tax relief for forgiven mortgage debt," said National Association of Realtors President Gary Thomas. "The extension will help many troubled borrowers who were uncertain about their future, and is vital to the nation's recovering housing market and economy."
Before Senator Stabenow's original bill was signed into law, if a family owed $150,000 on their home but could only sell it for $100,000, and the bank forgives the remaining $50,000 of the mortgage, the IRS treated this $50,000 as taxable income. That would mean an average middle class family would have to pay an additional $12,500 in income taxes on top of their regular taxes. Stabenow's law stopped this from happening for five years from 2008 through 2012, but would have expired for 2013 if it had not been extended.
Stabenow's provision was included as part of the agreement in Congress to avert the so-called fiscal cliff, a series of tax raises and spending cuts that was set to kick in on January 1. A number of tax provisions that were also set to expire Jan. 1 were renewed as part of the fiscal cliff agreement, including the Mortgage Forgiveness Tax Relief Act.