Bill Pushes Tax Relief for Home Sale Loss

From a tax perspective, nothing's worse than selling your home at a loss. It's like getting struck by lightning... twice. First, you're not allowed to claim a capital loss on your income taxes. To make things worse, if your lender agrees to cancel any part of the outstanding loan, you must pay income taxes on the cancellation. If you think that's unfair, you're not alone. That's why some members of Congress are pushing the Mortgage Cancellation Relief Act (H.R.1690).

A couple of years ago, Congress reduced the capital gains tax for people who sell at a profit. Under the new law, anyone who's owned their home as a principal residence for more than two years can take resale gains up to $250,000 and $500,000 for couples. But what about the poor souls who sell at a loss? Pity anyone who bought at the wrong time or the wrong place, and saw their home depreciate. And what about bad luck? Financial losses, medical emergencies, or corporate downsizing can still happen to anyone despite the rosy economic picture. After losing a home, you should be able to limit your financial losses, right?

Unfortunately, there's no capital loss tax break for the hapless homeowner who takes a loss. Uncle Sam is more charitable toward stock investors. Unlike people who lose on the stock market and claim the loss on sales of stocks or bonds on their taxes, when you lose money on your home, current law prohibits you from claiming a capital loss. So forget about writing off any of your lost home investment.

Uncle Sam's unforgiving stare doesn't stop there. Frequently, when home sellers can't pay off the balance of their home loans, they negotiate a "workout" agreement with their lender. If they're lucky, their lender will agree to forgive some or all of the outstanding debt after the sale. But instead of allowing homeowners to limit their losses in this way, the IRS penalizes them at tax time. The cancelled part of the loan is considered "income" and you must pay taxes on it.

Hopefully, legislative relief is on the way. Representatives Robert Andrews (D-NJ) and Mark Foley (R-FL) have introduced the Mortgage Cancellation Relief Act H.R. 1690) that would remove the tax penalty on cancelled home debt. If the sales proceeds are not enough to cover the loan balance on a principal home, and the lender agrees to cancel the balance, it's no longer taxed under the bill.

With the economy booming, and the budget deficit in decline, the federal government should be able to forgo the revenue from taxing cancelled mortgage loans. H.R. 1690 is likely to get a serious look from both Democrats and Republicans. Currently, the bill is pending in the House Ways and Means Committee.