Distressed homeowners who have completed short sales and worried about the looming tax consequences of cancelled or forgiven mortgage debt are one step closer to meaningful relief.
Late Tuesday, the Senate passed a bill retroactively extending the Mortgage Forgiveness Debt Relief Act through the year 2014 – meaning that homeowners of underwater properties (i.e., those owing more on their homes than the homes are currently worth) whose lenders have cancelled or forgiven debt as part of a short sale or similar transaction on their principal residence will not be penalized with tax liability. The Act, initially passed in 2007 and extended twice by Congress, expired at the end of 2013. Without this protection, the amount of cancelled or forgiven mortgage debt was treated as ordinary income, meaning that a distressed homeowner could be hit with crippling tax liability even after already giving up her home. These harsh tax consequences have made 2014 a particularly difficult year for homeowners facing foreclosure and trying to weigh their options.
The recent retroactive extension of key tax protections, which now awaits signature by the President, is great news for former homeowners like Ms. Lash (name changed to protect client confidentiality), a Legal Aid client who successfully completed a short sale in 2014 after nearly losing her home to foreclosure. Ms. Lash, a low-income D.C. homeowner and monolingual Spanish speaker, was sued by her lender in a foreclosure action. In a prior blog post from April of this year, we announced that D.C. Superior Court had recently implemented new procedures for foreclosure cases, allowing homeowners the opportunity to come to court and engage in early mediation with their lenders, even if they have not yet filed an answer to the complaint and default has been entered.
For homeowners like Ms. Lash, having the opportunity to come to court – even in the case of default – was critical to her discovering that her home was about to be auctioned off within days, and immediately connecting with an attorney who could stop it. The basis for cancelling the upcoming foreclosure sale: her mother, a co-owner and co-defendant in the case, had not been served with the complaint. On the date that the process server claimed he gave her the court papers, she was out of the country. She had passport stamps to prove it. The newly-implemented judicial foreclosure procedures allowed Ms. Lash to come to court before it was too late, speak with an attorney, and ask the judge to stop the sale. He did.
With the foreclosure sale cancelled, Ms. Lash was able to deal with her mortgage situation in a way that provided her more certainty, control, and comfort with the process. She completed a short sale. With the Senate’s passage of the temporary extension of the Mortgage Forgiveness Debt Relief Act protections, Ms. Lash is now one big step closer to putting this all behind her. We are thankful and relieved that other distressed homeowners like her will now get the same protections, and we hope Congress will act soon to extend this much-needed relief into the future.