An Assembly panel has approved legislation (AR-188) sponsored by Assembly Democrats Craig Coughlin and Pamela Lampitt urging the federal government to extend the Mortgage Forgiveness Debt Relief Act so beleaguered homeowners are not stuck paying taxes on debt that has been forgiven.
In late 2007, in response to the emerging financial crisis, the Mortgage Forgiveness Debt Relief Act was signed into law to relieve homeowners of tax liabilities due to housing debt forgiven by holders of mortgage loans. While Congress has extended the Act twice, the latest extension expired on January 1, 2014, so unless Congress extends the Act again, homeowners will be forced to pay taxes on debts that are forgiven by financial institutions.
“This bad situation is even worse for some New Jersey homeowners who have been forced to take buyouts from the state because their homes are in flood-prone areas, which were heavily affected by recent disasters such as Hurricane Sandy,” said Coughlin (D-Middlesex). “When the state makes buyout offers to these homeowners, it can only offer to purchase the homes at fair market value, which is often less than what the homeowners owe on their mortgages, due to the collapse of housing prices. If Congress fails to extend the act, these homeowners may be faced with large tax bills if they accept state buyouts, due to the debt which is typically forgiven by banks in buyout situations.”
The sponsors noted that before the act was signed into law, when a homeowner undergoing short sale, foreclosure, deed-in-lieu of foreclosure, or loan modification had mortgage debt forgiven by a financial institution, the forgiven debt was counted as taxable income for the homeowner, which could result in significant tax liability. The act helped homeowners who were underwater on their mortgages by providing them with a valuable tax break on mortgage debt forgiven by a financial institution.
“Many homeowners in New Jersey and elsewhere were underwater, owing more money to financial institutions than their homes were worth, and having trouble making their mortgage payments, which caused the number of short sales, foreclosures, deeds-in-lieu of foreclosure, and loan modifications to increase,” said Lampitt (D-Camden/Burlington). This stressful situation can be eased if the President and Congress extend this law to allow for tax forgiveness to homeowners who have already suffered significant financial losses. This is a fair and practical approach. If the debt doesn’t exist anymore, neither should the taxes on it.”
The measure urges Congress and the President to take all appropriate legislative action necessary to extend the Mortgage Forgiveness Debt Relief Act of 2007. Last week the House of Representatives approved H.R.5771, which, among other things, renews the contents of the Mortgage Forgiveness Debt Relief Act. The measure now heads to the Senate to be considered before Congress recesses on Dec. 11.
Coughlin’s and Lampitt’s resolution was approved by the Assembly Financial Institutions and Insurance Committee. Once approved by the full Assembly, copies of the resolution will be filed with the Secretary of State, and transmitted to the President of the United States and to each member of New Jersey’s congressional delegation.