U.S. Rep. Joe Courtney and state Attorney General George Jepsen on Tuesday called upon Congress to extend a recently-expired tax break for underwater homeowners to help ensure the continued recovery of the housing market.
Courtney and Jepsen urged Congressional action on the expired tax provision during a Tuesday morning press conference in Hartford.
The tax policy was passed in 2007 and prevented forgiven mortgage debt from being counted as income for tax purposes. The expiration of the provision will hit troubled homeowners whose mortgages have been modified or whose homes have been sold or foreclosed upon at a rate lower than what they owe. Without the provision, those homeowners have to pay taxes on the difference, which the Internal Revenue Service considers to be income.
For example, Jepsen said an underwater homeowner whose mortgage principal is reduced by $100,000 would see their taxable income jump by the same amount. He said that homeowner would then be on the hook for around $20,000 in additional taxes because it would look as if their income increased from $50,000 a year to $150,000 a year.
“By definition, these are families who are struggling, people who can’t make their existing payments. The notion that you could come up with $20,000 to pay off those taxes is ludicrous,” he said.
Courtney said Congress must act as soon as possible if it wants to see the recovery continue. He said the subprime real estate market was a key factor in the economic recession. Although the housing market has improved somewhat, he said there are still too many troubled homeowners to allow the policy to expire.
“There are still many closings, which today literally rely on having that tax exclusion continue and that if we are going to continue the process of trying to move some of these properties we need at least another year of extension,” he said.
Debra Chamberlain, president of the Connecticut Association of Realtors, said the legislation is overdue. She said realtors around the state see families still struggling with underwater home mortgages. She said some of those families have been hanging onto their properties for years.
“At the point that they finally make the tough choice to sell that house short or they’re unfortunately forced into a foreclosure, we’re there holding their hands and helping them wipe away the tears and figure out where they’re going to get the money to move out of the house,” she said. “The notion that they would then have to pay taxes on money for that shortfall is really unconscionable.”
During the press conference Courtney cited statistics compiled by the Connecticut Multiple Listing Service, which found 772 short sale closings pending in Connecticut as of Jan. 2. He said there are another 1,012 on the market. Those numbers don’t include Fairfield County, which does not participate in that listing service.
“We know, in fact, there are many, many more of these closings and properties that need to have the confidence and security that a principal write-down or short sale is not going to result in a tax burden for families that are struggling to begin with,” he said.
Congress has extended the provision twice since it was originally enacted. Courtney said he has co-sponsored a bill to extend it in the House and there is a companion bill likely to pass the Senate. At the moment, he said House leadership has not included the policy on their list of priorities for January.
The provision is among a number of tax policy extenders, which have not been acted on in the House as some representatives hope to pass more comprehensive tax reform, he said. Courtney said a broad tax compromise is unlikely in the current political climate and Congress should act to extend this policy now.
“It is just so important that we not allow some of these homeowners and some of these transactions to get hurt and damaged by clinging to a belief that there’s some goal of comprehensive tax reform in the future,” he said.