Published: February 2014

Homeowners could face extra tax burden in 2014

The foreclosure crisis is far from over for many homeowners. The expiration of the Mortgage Forgiveness Debt Relief Act means those who were forced to short sell their homes will be subject to higher tax rates by the IRS.

More than six years after the mortgage market imploded, the nation has not returned to pre-2008 foreclosure levels. Underwater homeowners who sold their homes in short sales or negotiated a mortgage balance reduction with their bank were protected from owing taxes on portions of mortgage debt that had been forgiven. However, this protection expired in December 2013 and the extra tax burden on those who are already financially vulnerable may prove crippling for families and communities.

For example, a family with a $150,000 mortgage who is allowed to sell their house for $100,000 is supposed to pay taxes on the remaining $50,000. The Mortgage Forgiveness Debt Relief Act saved these families from the tax burden.

Consumer Action joins housing advocates and lawmakers to urge members of Congress to extend the Mortgage Forgiveness Debt Relief Act and extend coverage to homeowners who were not previously included in its coverage. Homeowners who refinanced and received cash-out, or who paid off medical bills or student loans, or who took out a home equity loan to address deferred maintenance on their homes, cannot use the forgiveness exclusion to avoid paying income tax. These homeowners will have no additional income with which to pay the increased taxes and may remain deeply underwater after the loan modification. They should be protected under the Debt Relief Act.

An extension of the Mortgage Forgiveness Tax Relief Act should be enacted quickly. Taxing forgiven mortgage debt blocks the path to secure homeownership and financial stability for these families and undoes the intended benefits of the principal reduction.

Lead Organization

Americans for Financial Reform (AFR)

Other Organizations

AAA Fair Credit Foundation | Action for the Common Good | Americans for Financial Reform | Asian-American Homeownership Counseling, Inc. | Cambridge Credit Counseling Corp | Campaign for a Fair Settlement | Catholic Charities USA | Center for Popular Democracy | Center for Responsible Lending | ClearPoint Credit Counseling Solutions | Community Action Human Resources Agency | Consumer Action | Consumer Federation of America | Debthelper.com - Credit Card Management Services, Inc. | Esperanza | Greenlining Institute | Home Defenders League | HomeFree-USA | National Asian American Coalition | National Association of Consumer Advocates | National Coalition for Asian Pacific American Community Development | National Community Reinvestment Coalition | National Consumer Law Center (on behalf of our low income clients) | National Council of La Raza | National Education Association | National Fair Housing Alliance | National Housing Law Project | National Housing Resource Center | National Urban League | NID Housing Counseling Agency | Rural Community Assistance Corporation | The Center for American Progress | The Housing Research & Advocacy Center | The Leadership Conference on Civil and Human Rights | The National Association of Neighborhoods (NAN)

More Information

For more information, please visit the AFR website.

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Homeowners could face extra tax burden in 2014   (TaxReliefAct2.24.14_.pdf)