Mortgage Debt Relief Act Extended Through 2018 – Finally!

Posted on by Phil Querin

For a brief history of the multiple extensions of the The Mortgage Debt Relief Act of 2007 (“the Act”), go to my June 2017 post here. I predicted at the time that it would be extended through 2018; but I also predicted that news of the extension would be slow in coming, because this law – which no politician in their right mind would actively oppose – was a small bit player in the horse-trading that takes place at the end of each year for tax extenders,  and often is not finally settled until early the following year. Then, once the legislation is passed, it is applied retroactively to January 1 of the preceding year.

Only the federal government is permitted the luxury of dragging its feet for a year, and then patting itself on the back for making it retroactive.  Forgotten are the taxpayers who have had to hold their breath throughout the entirety of 2017, wondering when and if Congress would get its act together.

So it is again. According to a February 9, 2018 article in Accounting Today:

The bipartisan budget deal signed into law Friday by President Trump contains 36 tax extenders that had expired at the end of 2016 and makes them retroactive to 2017.

The deal includes many tax breaks for industries such as motorsports, horse racing, renewable energy, rum, and movie, TV and theater production (see Tax extenders added to bipartisan budget deal). The tax breaks are traditionally extended every year for only a year or two by Congress so as not to add more to the ballooning budget deficit….

So for those taxpayers who were able to either receive tax forgiveness in 2017, or reach a written agreement with their lender or servicer to receive it in 2018, the Act was extended through 2018. And this extension entailed very little ink – eight key punches to be exact:

Section 108(a)(1)(E) now reads:

(a)Exclusion from gross income

(1)In general Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—

(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged—

(i) before January 1, 20172018, or

(ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 20172018.

Caveat: Unfortunately, but of no surprise, a short sale or deed-in-lieu of foreclosure, for example, occurring this year, will not result in debt forgiveness.[1]

As a reminder, for purposes of  securing debt relief under ORS §108, the home must have met the following requirements:

  • It must have been the debtor’s primary residence;
  • It must have been occupied two of the past five years (e.g. prior to the event, such as a short sale);
  • The borrowed funds must have been used to buy, build, or substantially improve the home[2]; and
  • The maximum amount of principal eligible for exclusion is $2 million if married, filing jointly, and $1 million, if married filing separately.

Idle Thoughts.  I have always wondered whether debt “relief” for a primary residence secured by a deed of trust in Oregon would be treated as a taxable event in any case, since a lender or servicer cannot obtain a personal judgment against a homeowner per ORS 86.797(2). In other words, it would seem that Oregon is a non-recourse state under these circumstances.

Section 108 only applies to debt relief in “recourse” states, i.e. where the lender or servicer can obtain a deficiency judgment in foreclosure against the borrower on a residentail purchase money trust deed. It is my lay understanding that under such circumstances, a foreclosure or pre-foreclosure event would be treated as a “sale” to the lender for the greater of the fair market value of the property or the outstanding balance of the debt. If the home was occupied as a primary residence for two of the past five years, and a long term capital gain were realized on this “sale”, it would likely qualify for gain avoidance under IRC §1222. That’s a good thing. If there was a long term capital loss, there would be no write-off, because it was a primary residence, and not used in a trade or business.  Not sure that’s the end of the world, since the homeowner had likely – figuratively speaking – already written the home of as a loss, due to the negative equity.

But these ruminations are pure conjecture – not tax advice.  I will leave these issues to the CPAs and tax attorneys to ponder. ~PCQ

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[1] However, Section 108 also provides for debt relief arising as the result a Chapter 13 proceeding and insolvency. See, 108(a)(1)(A) and (B).

[2] This also includes any debt secured by a primary residence used to refinance the home mortgage, but only up to the amount of the old mortgage’s principal just before the refinancing. Taking cash out for any reason, e.g. debt consolidation, student loans, divorce settlement, etc. is not protected, i.e. if cancelled, it’s subject to ordinary income tax. [I suspect if the refinance funds were used to substantially improve the home, it might also be exempt if later cancelled, even though the refi funds exceeded the then-existing principal balance of the original mortgage. However, this should be verified with a tax lawyer or CPA. I am neither.]

Posted in Broker Risk Management, Deed in Lieu of Foreclosure, Deficiency Liability, Financial Crisis, Foreclosure, Legislation - Federal, Miscellany, Real Estate Laws, Realtor Risk Management, Residential Housiing | Tagged , , , , , ,
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