Homeowners who have reached a debt settlement agreement with their lenders and have had a portion of their mortgage debt forgiven may get some extended tax relief from new legislation winding its way through Congress.

The Mortgage Cancellation Relief Act of 2012 (H.R. 4202), introduced last week by U.S. Rep. Charles Rangel, D-NY, extends the federal income tax relief provision that exempts struggling homeowners from having to pay taxes on the portion of mortgage debt forgiven by a financial institution. In 2007, Rangel authored the current Mortgage Cancellation Relief Act, which expires at the end of 2012. The proposed bill would extend the tax debt relief act until 2014.

Over the last five years, American homes have lost $7 trillion in value. The declining values have caused many families facing foreclosure to “short sell” their homes for less that what they paid for them and sometimes for less than the outstanding mortgage debt. Prior to the 2007 law, the amount of any loan forgiven after a short sell or foreclosure was considered taxable federal income. Rangel’s proposal would ensure that struggling homeowners would be able to avoid for another two years the double-whammy of having to pay federal income taxes after losing their homes.

“The sanctity of our homes is at the heart of the American Dream,” Rangel said in a statement. “The collapse of the American housing market that began in late 2006 has brought our economy to its knees and left Americans from all walks of life without a home or struggling to keep a roof over their head. While the law cannot repair the borrowers’ credit or punish those who misled them into taking out inappropriate loans, it addresses a fundamental unfairness in the lives of those who find themselves in these dire circumstances” (“Rangel Introduces Bill To Extend Relief To Americans Losing Their Homes,” Office of U.S. Rep. Charles Rangel press release, March 21, 2012).

There are currently 12 million Americans in danger of losing their homes because they are underwater and owe more on their mortgages than their homes are worth. An estimated 4 million Americans have lost their homes to foreclosure since the Mortgage Cancellation Relief Act was signed into law in 2007.

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