House Passes Tax Relief for Homeowners in Foreclosure (Update1)
By Alison Fitzgerald and Ryan J. Donmoyer
Oct. 4 (Bloomberg) -- The House approved today a measure to protect mortgage borrowers from getting a surprise tax bill from the Internal Revenue Service after a lender has foreclosed on their home.
The bill, which still must pass in the Senate and be signed by President George W. Bush to become law, would prevent the IRS from taxing any debt forgiven in a foreclosure as income at rates as high as 35 percent. The legislation would be retroactive to Jan. 1, sparing many of those who lost their homes to foreclosure this year from a surprise tax bill if their mortgage was canceled.
``This is a common-sense bill that eliminates the double whammy of someone losing their home to foreclosure and then facing an additional tax bill right when they're down on their knees anyway,'' said Representative Dennis Cardozo, a California Democrat who said he represents ``the foreclosure capital of the United States.''
The measure passed by a vote of 386 to 27.
More than 2 million Americans are likely to lose their homes as low introductory interest rates on mortgages are reset to higher levels and borrowers struggle to make payments, according to the Center for Responsible Lending, a research organization in Durham, North Carolina.
At the end of last year, there were 7.5 million subprime mortgage borrowers with $1.4 trillion in loans, the group said. Tighter credit and higher borrowing costs threaten the housing market, which has been an engine of U.S. economic growth.
Second Homes
``It is unfair for a family to have to pay a tax on their income that they simply do not receive,'' Representative Kathy Castor, a Florida Democrat, said today. ``Relieving families of this tax burden is the least we can do.''
To pay for the tax relief, the lawmakers approved rules making it harder for people to exclude as much as $500,000 in profit from capital-gains taxes on the sale of second homes. The provision would raise $2 billion in additional taxes over the next decade, according to an estimate by the congressional Joint Committee on Taxation.
Industry trade groups including the National Association of Realtors, the National Association of Home Builders and the Mortgage Brokers Association, which want homeowners to be protected from taxes on forgiven debt, support the measure. The measure also would extend the tax deduction for private mortgage insurance.
Permanent Versus Temporary
The changes approved by the House today would be permanent, going against a request by the Bush administration that they last only three years to address the current housing market crisis. Michael Desmond, tax legislative counsel at the Treasury Department, said last week that the Bush administration would back the measure anyway.
Bush issued a statement saying he applauded the House action.
``I urge the Senate to swiftly consider this legislation and make it temporary,'' the statement said.
Some Republicans who supported the bill overall said they would have preferred the provision be temporary and objected to raising the taxes on the sale of second homes.
``I for one don't believe we should raise taxes on one family to cut taxes on another,'' said Representative Eric Cantor, a Virginia Republican. Louisiana Representative Jim McCrery said the provision could hurt housing markets in coastal communities.
Tightens Qualification
The realtors association told lawmakers in a letter last week that the vacation-home provision ``does not eliminate any tax benefit but rather tightens the requirement'' for qualifying for the exclusion from capital-gains taxation on the sale of a home.
U.S. law generally allows married homeowners to exclude as much as $500,000 in profit on the sale of a second home, provided the owners have lived in it for at least two out of the previous five years. Amounts above $500,000 are taxable at rates as high as 15 percent. The exclusion amount is $250,000 for unmarried homeowners.
Americans who own two homes frequently sell one and live in the other for two additional years to claim the benefit twice, which is permissible.
The proposal adopted today would let only a portion of the profit on a vacation home be excluded from tax, depending on how long the property has been owned rather than lived in.
For example, if a married couple owned a vacation home for eight years, then lived in it for two years before selling, only 20 percent of their profit would be eligible for the capital- gains exclusion.
Last Updated: October 4, 2007 19:53 EDT
Source: Bloomberg News