Massachusetts Attorney General Martha Coakley Tuesday called for the extension of a federal tax break that benefits struggling homeowners who are allowed to jettison mortgage debt.
Coakley joined 41 other attorneys general in urging Congressional leaders to extend the tax relief to borrowers who have had their mortgage debt canceled because their homes dropped in value or their incomes fell.
The law, set to expire at the end of 2012, applies to people who receive loan modifications, lose their homes to foreclosure, or go through with a so-called short sale — a process in which borrowers sell a home for less than the mortgage balance. Under the law, debt that is forgiven does not have to be considered as taxable income.
The tax assistance is especially important now, as more US homeowners benefit from a $25 billion national mortgage settlement attorneys general reached with five top US lenders over shoddy foreclosure practices. Billions of dollars in principal reduction have been credited to financially-troubled homeowners, state officials said. Already, about 4,000 Massachusetts homeowners have received some kind of mortgage assistance through the settlement, including principal writedowns and short sales, according to a report released Monday.
If Congress does not act and such debt relief becomes taxable, it could pose a hefty tax burden for “families who can least afford it,” the attorneys general said in a joint letter to US senators and representatives, citing a Congressional Budget Office assessment of what might happen.
“This tax relief is critical for helping struggling homeowners stay in their homes as we work to repair the damage from the foreclosure crisis,” Coakley said in a statement. “We urge Congress to ensure families are not hit with an unexpected tax bill when seeking a loan modification.”