Wednesday, June 19, 2013 | 5:19 p.m.
For many underwater Nevada homeowners, the most important part of the New Year’s Day fiscal cliff deal wasn’t the assurance that their income tax rates wouldn’t rise, but the guarantee that for the coming year, they could refinance their mortgages or short-sell their houses without owing income taxes on the money they saved.
But in another six months, that guarantee will expire — potentially setting back financially strapped homeowners by tens of thousands of dollars.
Now, senators from the two of the states hit hardest by the bursting of the housing bubble are trying to make sure Congress extends mortgage forgiveness tax relief for at least two years.
Nevada Sen. Dean Heller and Michigan Sen. Debbie Stabenow released a bill Wednesday that would extend mortgage forgiveness tax relief until the end of 2015.
“If Congress does not act this year, then thousands of Nevadans who are underwater in their homes will be forced to pay a tax at a time when what they need is some relief,” Heller said. “This legislation is a common sense approach that will prevent Nevadans from being taxed on income they never received.”
In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act, which allowed homeowners to exempt up to $2 million of forgiven home mortgage debt to be written tax-free. Before then, the IRS taxed any debt that was waived as income.
The extension of the provision under the fiscal cliff bill provided significant relief to Nevada homeowners, about 60 percent of whom were underwater on their mortgages at the time of passage. In the first quarter of 2013, about 45 percent of Nevada mortgages are underwater — an improvement, but still enough to rank the Silver State as the worst in the nation.
As a “Hardest Hit” state, Nevada has federal money dedicated to encouraging banks and other mortgage service providers to reduce the principal on underwater loans. The idea of principal reduction is that by reducing the overall amount owed, it becomes more manageable for homeowners to pay off their debt and stay in their homes. Recipients of the assistance cannot earn more than one and a half times the area’s median income — which was $48,927 in Las Vegas in 2011 — and cannot have a mortgage balance of more than $427,184 in Clark County.
Such principal reductions can be worth up to $100,000, according to the state’s Department of Business and Industry — a significant amount to be taxed as income, should mortgage forgiveness tax relief expire.