When April 15 rolls around this year, JPMorgan Chase – and numerous other banks that agreed to billion-dollar settlements as redress for illegal foreclosure practices – will be able to write off that debt to the Internal Revenue Service.
Homeowners who received that relief? Not so lucky.
Our Miami foreclosure defense lawyers understand that while Chase will receive forgiveness from the government, many families who just scraped by being able to hang onto their homes – even those who may have lost them – will have to treat those relief dollars as taxable income.
There had been a tax exemption for mortgage debt forgiveness, starting in 2007, that allowed homeowners to accept foreclosure relief from banks that had wronged them without having to be taxed on it. No more, since Congress allowed that exemption to expire at the end of last year.
This ends up leaving homeowners financially stuck. If they are already behind on their mortgage, accepting this help might seem their only option.
But let’s consider the true cost of this “help.” Let’s say a single person is $30,000 underwater on his home. He normally makes $36,000 a year. Under the current federal income tax schedule, he would contribute 15 percent of his income to taxes, which means he would pay about $5,400 in income taxes for the year.
But now let’s say that same person receives $20,000 in mortgage debt forgiveness from his bank (which, mind you, is only offering this program because of the central role these firms played in pushing predatory loans on people who could never have afforded them in the first place). That extra $20,000, considered as income, puts this individual in the next highest income bracket, meaning now, he is expected to pay 25 percent of his income.
Instead of $36,000, his income is considered to be $56,000. That means he’ll have to pay about $14,000 in taxes. This is $8,600 more than he would normally have to pay in income taxes, and in total, is 39 percent of his gross pay. Plus, he still owes another $10,000 on his mortgage.
And we call this relief?
A proposed bill would have allowed the mortgage tax break to be extended, but the measure did not gain enough support in Congress. Meanwhile, we have an estimated 6.5 million homeowners still underwater, according to real estate data center CoreLogic. Although legislators have mulled a broad overhaul of the entire tax system that could change things for homeowners, there is no certainty as to when that would happen. The fact that we’re coming up on a major election year gives us little hope that such a sweeping measure could pass.
There is a possibility that Congress could reinstate the tax break and apply it retroactively, but that doesn’t help those who are pressed to make a decision right now.
Some of those who might be most deeply impacted will be those initiating short sales. These are deals in which the bank agrees to let the homeowner sell the property for less than what they owe. The number of short sales have ballooned in recent years because there was no way properties were going to sell for what people owed, given that the original mortgage was so grossly inflated. A short sale is a way of avoiding foreclosure, and the bank then cancels the debt.
But now, that debt is going to be considered income. As the scenario above shows, this could be very dangerous for people who are continuing to struggle financially, and may end up pushing the number of bankruptcies up fairly significantly.
With stakes so high, homeowners can’t afford to approach these troubles alone. Thankfully, you don’t have to.
If you’re battling foreclosure in Miami or the surrounding areas contact Jacobs Keeley for a confidential appointment to discuss your rights. Call (305) 358-7991. Also, don’t miss Miami Foreclosure Attorney Bruce Jacobs on 880AM/the Biz, every Wednesday from 5 p.m. to 6 p.m. on “Mortgage Wars,” discussing foreclosure topics that matter to YOU.
Welcome Relief for Homeowners, Until the Tax Bill Arrives, Feb. 4, 2014, By Shaila Dewan, The New York Times
More Blog Entries:
Scams Target Homeowners, Increase Foreclosure Risk, Jan. 31, 2014, Miami Foreclosure Defense Lawyer Blog