With the congressional season rapidly drawing to a close, thousands of American homeowners are in line to benefit financially from two little-noticed tax developments on Capitol Hill.
One involves the surprise rebirth of a reform designed to provide tax relief for certain homeowners who sell their property at a loss. The other involves the retention in the tax code of one of the most generous provisions for owners of primary residences and vacation property--a rare federal sanction to pocket ordinary income with zero taxation.
Here's a quick update on both issues and how they may affect you.
You may recall that President Clinton vetoed Congress's big 1999 tax-cut bill in September. That bill had a handful of tax goodies for property owners, but it lacked a key bipartisan reform pushed by two members of the House.
Reps. Robert E. Andrews (D-N.J.) and Mark Foley (R-Fla.) called their bill the "Mortgage Cancellation Relief Act" and asked their tax-writing colleagues to include it in the 1999 tax bill. They were turned down, perhaps luckily, considering the later presidential veto. But now the language of their proposal has been grafted onto a major bill heading for action in the House--legislation that would raise the minimum wage.
Andrews says the House leadership was receptive to the move "because good ideas never really die, they just wait their turn." Andrews's born-again tax-relief bill would correct what many real estate and financial experts consider a harsh and unwarranted penalty in the current tax code against homeowners who are down on their luck because of illness or job loss.
Unknown to most homeowners, under current law if you have the bad luck to fall seriously behind on your mortgage, the federal tax system can hit you with a financial double whammy. Say you sell your house for less than your mortgage balance, and the lender agrees not to come after you for the unpaid balance. This happens with increasing frequency as lenders seek to avoid costly foreclosures against defaulting borrowers and agree instead to "short sales," where the proceeds are used to repay the lender most--but not all--of the amount owed.
Mortgage market experts say thousands of such sales occur around the country every year. Andrews estimates that in his southern New Jersey district alone "there are hundreds of people" whose mortgage balances exceed the value of their home. In the parlance of the mortgage industry, their mortgages are "under water."
For example, you bought a house for $150,000 with a $135,000 mortgage. Then you lost your job, couldn't make your monthly payments and faced the nightmare of foreclosure. But your lender checked what your house would bring at a foreclosure sale and found that it was just $125,000--$10,000 less than you owed on the loan.
After all its brokerage, legal, maintenance and other costs, the lender calculated it would pocket less than $100,000. Instead, as an alternative to foreclosure, the lender suggests a "workout" arrangement: You or a real estate agent are allowed to find a buyer who will buy the property quickly at $125,000 and the lender won't foreclose and won't come after you for the $10,000 remaining on the mortgage.
That's great, you say. But then you confront the federal tax code's double whammy: The IRS sees the forgiveness or cancellation of the $10,000 of debt as income to you and demands taxes on it at your regular tax rate.
"That's unjust," Andrews says. "Why hit people with taxes when they've just taken a loss and lost their house?"
To remedy that, his legislative proposal would provide a tax-free exemption for any amount a mortgage lender forgives on a principal home sale, provided the sale proceeds are insufficient to pay off the loan balance.
A second tax development of potentially great interest to large numbers of homeowners: Congress apparently is going to leave untouched for another year one of the few true gifts in the tax code--the unlimited tax-free exclusion on any money you earn by renting out either your principal home or your second home for fewer than 15 days during a year. There are not many income-earning activities that you can pursue legally where the dollars you earn are totally tax-free, but this loophole for homeowners is for real.
As long as you don't rent the property out for more than a total of 14 days during a tax year, you can put whatever you earn--$500 or $5,000 or $10,000--straight into your pocket. There have been frequent efforts in Congress to eliminate the loophole, but those efforts appear to be over for 1999.
So figure out a way to use this tax-code benefit in 2000--just in case Congress changes its mind for future years.