Congress inches closer to extending tax break for 'underwater' sellers

Lawmakers are hoping to extend a recently expired rule that allows homeowners who sell at a loss to avoid thousands of dollars in federal taxes.

Q. I know that homeowners who sell at a loss can't deduct the loss on their federal income-tax return. But several months ago, you wrote that Congress was considering a bill that would prevent taxing the money that was "forgiven" by a bank that forecloses on a house or agrees to a short sale when the selling price isn't high enough to pay off the mortgage. Did the measure pass?

A. Not yet, but it appears to be gathering steam. It would extend a similar tax break that expired at the end of last year.

Several years ago, owners who sold their homes for less than their outstanding loan balance were taxed on their so-called phantom income. To illustrate, if you sold for $100,000 but the balance on the loan was $130,000, you'd have to pay federal taxes on the $30,000 of forgiven debt.

That would be $7,500 for a seller in the typical 25 percent tax bracket, a savage blow for someone who was already walking away with no money from the sale.

That all changed in 2007, when Congress approved the Mortgage Forgiveness Debt Relief Act. It allows most sellers to exempt up to $2 million in forgiven debt if they are married and file their taxes jointly, or $1 million for those who file as a single.

Failure to extend the measure would deal a crippling financial strike to sellers whose homes are now worth much less than they originally paid.

Fortunately, Sen. Dean Heller, R-Nev., and Sen. Debbie Stabenow, D-Mich., are working together on a plan that would extend the law through the end of 2016. Both are powerful members of the tax-writing Senate Finance Committee, and Heller recently told a group of real estate agents meeting in Washington that securing passage of the bill is one of his "top priorities" in the current legislative session.

You can learn more about this valuable tax break by getting a copy of Internal Revenue Service Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonment, by calling the agency at 800-829-3676 or by downloading it to your computer from www.irs.gov.

Q. We live on a street where it's very difficult to find a parking spot for our family's extra car. When we parked the car in front of our neighbor's house last week, she came bursting out of her front door and started screaming that we had no right to park in "her" space. Are parking spots on public streets reserved solely for the homeowner who lives at the same address?

A. Generally, no. An individual usually can't lay claim to a curbside spot on a taxpayer-funded roadway: They're open to the public on a first-come, first-served basis.

The rules are different for privately owned streets and parking facilities. It's not unusual for a tenant to get an assigned parking spot in an apartment complex, or for residents in a condominium or townhouse project to have the exclusive right to use one or two designated spots. Neighbors who ignore the rules and park in those reserved spaces can be fined or even towed.

Q. I am trying to refinance my home. Some unpaid medical bills that I incurred several years ago finally have been deleted from my credit report, but my credit score is still the same. How come my score didn't go up?

A. Your score will eventually rise, but it will likely take weeks or even a few months.

Having negative information deleted from a report is obviously good news. But it's important to remember that scores also are affected by your longer-term credit behavior, so the bad information that is wiped away doesn't immediately result in an increase in your score. Ironically, it could even result in a short-term decrease because the deletion introduces a certain amount of instability on your credit record that initially may offset the beneficial aspects of the deleted items.

Don't worry. Your score certainly will rise sooner rather than later, provided that you make all of your future debt payments in a timely fashion.

Real estate trivia: The IRS says that 83 percent of taxpayers, most of them homeowners, qualified for a refund in February. The average payout was $3,120.

• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405.

© 2015, Cowles Syndicate Inc.