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 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.
“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 Sen. Debbie Stabenow, D-Mich., 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, 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 IRS 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.
A bill in the Senate to extend the exemption has 19 co-sponsors, including two Republicans from states hit hard by foreclosures, Johnny Isakson of Georgia and Dean Heller of Nevada. In the House, Joe Heck, R-Nev., is the bill’s sponsor. His three co-sponsors are Democrats.
In an interview, Isakson said that forgiven debt was nothing more than “phantom income” and should not be taxed. He said it would be unfair to end the exemption for those families who have managed to hold on to their homes.
