Tweet
Here’s an almost completely unremarked-upon side effect of the foreclosure fraud settlement: the tax implications. If you are one of the lucky few eligible to receive a principal reduction from the settlement, when the banks aren’t paying off their penalty bulldozing homes and waiving deficiency judgments, you have to reckon with this: because of the expiration of a Congressional law, every dollar you receive in principal reduction would be viewed for tax purposes as income, and thusly taxed. Most of the people needing a principal reduction are in dire financial straits; they wouldn’t need a write-down otherwise. So now, we’re going to hit them with a big tax bill that they can pay for with money they don’t have. A $50,000 principal reduction, entirely possible under this settlement, could lead to a $15,000 levy or more, depending on the income level and tax situation of the borrower. Even the $2,000 “sorry you lost your home” payments envisioned by the settlement could be subject to taxation, reducing their impact.
Democratic Reps. Jim McDermott, John Larson and Shelley Berkley, members of the tax-writing House Ways and Means Committee, have recognized this, and filed legislation to remedy it, which they’re calling the “Homeowners Tax Fairness Act.” Every Democratic member on Ways and Means endorsed it. This is an excerpt from their press release:
Representatives Jim McDermott (D-WA), John Larson (D-CT) and Shelley Berkley (D-NV) introduced the “Homeowners Tax Fairness Act” today to protect homeowners and servicemembers who were wrongly foreclosed on and entitled to relief under the historic national mortgage settlement from additional tax burdens.
Homeowners receiving relief in the form of mortgage debt forgiveness and direct cash payments for wrongful foreclosure could be subject to federal income tax. Moreover, additional taxes would be owed on the payments made to servicemembers who were wrongfully foreclosed on while deployed overseas.
To prevent that injustice, the Homeowners Tax Fairness Act would extend the exclusion for debt forgiveness on a primary residence throughout the term of the settlement agreement, and exclude the relief payments from income for homeowners and servicemembers.
Specifically, the Homeowners Tax Fairness Act extends a 2007 law that would exclude principal reduction from being counted as income for a particular borrower. It would also exclude the $2,000 cash payments as income, and the very large payments to servicemembers – as much as $116,000 – for wrongful foreclosures and violations of the Servicemembers Civil Relief Act. Finally, they would deny the banks a tax deduction for those payments to servicemembers.
Normally I wouldn’t report on a bill filed in the Republican House by Democratic members. But think about how absurd this all is. Homeowners were ripped off, often by faulty appraisals artificially increasing the value of their home at purchase. They were steered into bad loans at the height of the bubble, and then the bubble collapsed. Now they are massively underwater, and they lost all their equity in the home. It turns out that was largely done illegally. And now if they are lucky enough to get a chance at relief, surprise! They’ll get a hefty tax bill they can’t pay for the amount of restructuring of their loan.
House Republicans have shown themselves to be very sensitive to at least the plight of servicemembers who were wrongfully foreclosed upon by the banks. So that could be the hook to get this into law. It’s urgently needed to prevent yet another indignity from being put onto homeowners.
10 Comments
Support this site!
Subscribe to the newsletter
Advertise on Firedoglake
Send
us your tips
Make us your homepage
About FDL News Desk
There are a lot of things related to this mess that have not, and are not, being discussed anywhere! This is just one. Another is the deficiency judgment being collectible, the banks claiming their losses through PMI – who then go after the homeowner for reimbursement on the claim – that deficiency judgments are also considered taxable income until the end of this year, with Barney Frank putting up a bill to waive that, and finally you have Freddie Mac who is instructing their servicing companies to not go after the former homeowners for the amount of the deficiency judgement, yet it’s ok for people who’ve gone through the entire foreclosure process and lost their homes!
Pardon my cynicism, but this is just a dog and pony show the Dems are pretending to care about so at least it would ‘look like’ they tried to do something.
I can’t decide which is greater:
The fuckery of this administration and Congress, or:
The incompetence of this administration and Congress?
Tie game? Photo finish? Dead heat?
re: “an almost completely unremarked-upon side effect of the foreclosure fraud settlement”
had a paragraph on that a month ago, riffing on a post by yves: http://my.firedoglake.com/rjsigmund/2012/02/26/notes-on-home-sales-the-fraudclosure-glitch-gas-oil-prices-et-al/
Is there actually a reasonable reason as to why an adjustment to principal shouldn’t be considered income? Didn’t think so.
While they’re changing this portion of the law, Congress in its wisdom might also allow a LOSS on the sale of one’s home to be realized.
When someone sells his/her home, if there’s a gain, it’s taxed.
However, if there’s a LOSS, too bad for the homeowner. This seems grossly unfair.
Three or four years ago, I met a new neighbor who moved to my neck of the woods because his wife had got a job with Intel (this place is packed with imported geniuses). And in order for them to move, he said they had to sell their old house through a short-sale. I asked if he had to pay taxes on the banks losses (his gains), and he proudly said no because Bush had signed some bill. Then a couple years ago he got a tax form in the mail saying they owed over $41,000. So I guess it’s now Obama’s turn to act like he’s here to help.
Plus, it’s too bad that Dodd and Frank were bought-and-paid-for because it sure would have been great if we were able to monitor credit-default swap activities. This leads me to believe that someone in our TBTF banking system is still profiting from distressed mortgage-bank securities.
a house is to live in, not an investment…would a renter also be allowed to deduct his rent as a loss?
and where would that end? would one be able to deduct the loss on a sale of a car? after all, both cars and houses are depreciating assets…
both cars and houses are depreciating assets…”
true – but unlike the rich that I once knew the tax situation of – who put their living expenses into corporations so those depreciating assets got tax deductions – illegal in theory to hide living expenses in corporations but done all the time –
the poor non incorporated person gets no loss, no loss carryforward, and no depreciation. It is good to be a corporation in the US that is treated as a person – except when it is not.
As to fellow that said is there any real reason to treated the waiving of a dif. judgement as not income – again look to corporations where things can be structured to make the “income” just a downward original cost adjustment on some hidden from taxation special purpose corporation.
Yves (Susan) perhaps did not note, as is not noted here, that the income tax effect is wiped out in the same bankruptcy that wipes out the deficiency. In a dozen states the only way to get rid of the def. is bankruptcy.
But it would be nice to have the suggested new law.
David, – I like your idea of using “servicemembers who were wrongfully foreclosed upon by the banks” as the hook to get it passed – I hope those in Congress are listening to you.