From the WSJ:
Last-minute negotiations in Washington have left real-estate agents and sellers nervous about the possibility that distressed homeowners could receive an unwelcome tax hit.
Congress has yet to reach an agreement to extend a tax break that forgives taxes on owners who sell their home for less the remaining mortgage balance in what is known as a short sale. The provision, which was passed in 2007 under President George W. Bush, would forgive an estimated $5.1 billion of taxes for homeowners who have been battered by the foreclosure crisis if it is extended for two years.
Otherwise distressed owners would have to pay taxes on the difference between what they owe on the mortgage and the amount raised in the short sale. They also would have to pay taxes on the difference if the lender agrees to reduce the principal amount that the borrower owes.
For example, if someone sells their home for $250,000 and owes $300,000 on their mortgage, they would owe taxes on $50,000—roughly equal to the country’s median household income.
Technically, the tax break expired at the end of 2014, leaving homeowners in limbo for 2015. Although it is widely expected to pass, if it weren’t renewed, homeowners who received some relief this year could now take a hit when they file their taxes next year.
“Particularly as the job market has improved since the recession, lenders are trying to work with borrowers who are distressed to keep them in their homes. Borrowers need the certainty that they will not be faced with a large, unexpected tax bill,” said Bill Killmer, senior vice president for legislative and political affairs at the Mortgage Bankers Association.
Although eight years have passed since the housing crisis began, some 13.4% of homeowners remain underwater, meaning they owe more than their homes are worth, according to Zillow, a real-estate information company.