A bill approved by a committee in the North Carolina House of Representatives would allow distressed homeowners to omit forgiven principal mortgage loan debt when reporting tax income at the end of the year, according to a media reports.
The bill that was just approved by the House committee was actually a rewritten version of a bill that passed in the North Carolina State Senate last month that would require taxpayers to count forgiven mortgage debt – the remaining mortgage loan balance when a home is sold in a "short sale" to avoid foreclosure – as part of their gross income when filing tax returns.
The rewritten North Carolina bill would allow homeowners to exclude the forgiven tax debt from their taxable income. For example, according to a report from the Charlotte Observer, if a homeowner had $20,000 worth of principal mortgage debt forgiven, that homeowner would have to pay $1,160 in state taxes if that forgiven debt is listed as taxable income.
According to the report from the Observer, about 4,000 homeowners would be affected by the rewritten bill.
North Carolina Representative Bill Brawley, a Republican who is the chairman of the House Financial Committee, said that if the rewritten bill passes – and he expects it to, even though most Republicans who control the House don't want it to – then he estimates it would cost the state about $14 million in lost revenue by not going along with the version of the bill that passed in the State Senate last month.
For years in response to the housing crisis, North Carolina permitted homeowners to exclude forgiven mortgage debt as taxable income, in accordance with similar laws the U.S. Congress enacted for federal income taxes. The Mortgage Forgiveness Debt Relief Act of 2007, originally signed into law by President George W. Bush, relieved distressed homeowners from having to pay taxes on forgiven mortgage debt for the three calendar years of 2007 through 2009. That tax exemption was extended three more years until the end of 2012 with the Emergency Economic Stabilization Act of 2008, and it was extended until the end of 2013 with the American Taxpayer Relief Act of 2012. Just before Christmas last year, President Obama signed a House bill into law that retroactively extended the tax break until the end of 2014. With the number of foreclosures steadily declining nationwide since 2010, it remains to be seen if that tax break will be extended into 2015 for federal income taxes.