This Article recently appeared in the New York Times.
Come tax time, JPMorgan Chase will be able to write off the $1.5 billion in debt relief it must give homeowners to satisfy the terms of a recent settlement.
But the homeowners who receive the help will have to treat it as taxable income, resulting in whopping tax bills for many families who have just lost their homes or only narrowly managed to keep them.
They are not alone. A tax exemption for mortgage debt forgiveness, put in place when the economy began to falter in 2007, was allowed to expire on Dec. 31, leaving hundreds of thousands of struggling homeowners in financial limbo even as the Obama administration has tried to encourage such debt write-downs.
Congress routinely allows tax breaks to expire and then reinstates them, usually retroactively, as it did last year. But the stakes are high for families dealing with large declines in their home values, and reinstatement of the tax breaks is more uncertain because of a movement in Congress to broadly overhaul the tax code, which, despite its long-shot prospects in an election year, could end up eclipsing smaller tax issues.
“Frankly, I’m worried because this should have gotten done before the end of the year and we’ve got families that have to make decisions now,” said Senator Debbie Stabenow, Democrat of Michigan, who is the sponsor of a bill that would extend the mortgage tax break.
The tax exemption was intended to help homeowners who are underwater — that is, who owe more on their mortgages than their homes are worth. According to the real estate data service CoreLogic, there are still more than 6.4 million households underwater.
Typically, if someone lends you money and later says you do not have to pay it back, the I.R.S. counts the amount forgiven as income, except in cases of bankruptcy or insolvency.
Short sales, in which a bank agrees to let homeowners sell their homes for less than they owe (a common way of avoiding outright foreclosure), are a form of canceled debt, as are loan modifications that reduce the amount owed.
Loss of the exemption is a financial body blow to homeowners already struggling to make ends meet. “I’m in a hole here — I’m trying to work my way out,’” said Eric Heil, 50, a hospital imaging technician who said a divorce and reduced income were forcing him to sell the house he has owned for 18 years in Parma, Ohio. “And the government’s going to say you have to pay taxes on it?”
Mr. Heil owes $250,000 on his mortgage, and has found a buyer willing to take the house for $150,000. The bank has agreed. But if Congress does not extend the exemption, he will be forced to count the $100,000 difference as income. That would mean a $28,000 tax bill, and Mr. Heil has no idea how he would afford it.
The number of people using the mortgage debt relief exemption has increased every year, reaching almost 100,000 in 2011, the most recent year for which the I.R.S. has figures. That number could be far greater in 2013, when there were more than a quarter-million short sales, according to Daren Blomquist of RealtyTrac, who estimates that those families received an average debt reduction of roughly $37,000. If the exemption had not been in place, that would have translated to an extra $9,250 tax bill for those in the 25 percent bracket.
Many homeowners are so deeply underwater that they require much more help. Under a separate mortgage settlement involving the five largest lenders, more than 90,000 homeowners received debt relief averaging $109,000 each.