NC Budget and Tax Center

The tax shift continues

State lawmakers are targeting cash-strapped homeowners as they continue to pursue tax changes that would shift even more of the tax load to low- and middle-income taxpayers, while preserving tax benefits that have largely flowed to the wealthy and profitable corporations.

Legislation approved by the state Senate (Senate Bill 20) would require homeowners to pay state income tax on mortgage debt forgiven by lenders. Meanwhile, financial institutions that provide such consumer relief are allowed to deduct the expense as a tax write-off.

The proposal would undermine a key element of North Carolina’s recovery from the nationwide housing crisis that fueled the Great Recession. In the wake of the crisis, a number of financial institutions  agreed to  settlements that provide consumers relief for unaffordable mortgages. This often meant reducing the amount of principal debt they owed on their mortgages to make them more affordable and lessen the likelihood of foreclosure. Furthermore, the 49-state National Mortgage Settlement encourages mortgage servicers to provide such relief to distressed borrowers affected by the housing crisis.

The goal of these settlements is to ensure that homeowners who were preyed upon by unethical lenders do not fall into the financial tailspin that foreclosure often creates. The tax change proposed by the Senate would require cash-strapped homeowners who have already suffered from the disastrous housing crisis and economic downturn to report this debt forgiveness as income, even though no actual cash is provided to the homeowners.

This could deter families from accepting bank offers to modify their mortgage loans because they cannot afford to pay taxes on the amount of relief they get. Distressed homeowners seeking to stabilize their finances and rebuild in the wake of the housing crisis would face a major setback.

Moreover, housing is an important part of North Carolina’s overall economy. A healthy housing market is key to the state’s ongoing economic recovery. The financial and foreclosure crises cost trillions of dollars in household and financial wealth, wreaking havoc on state finances. Preventing foreclosures and helping families stay in their homes benefits everyone, as stable neighborhoods help sustain home values, promote safe and vibrant communities, and build wealth.

The slow economic recovery remains very uneven, with all of the income gains since 2009 captured by the top 1 percent of income earners. Asking low- and middle-income families struggling to stay in their homes to carry a heavier tax load is unfair. Especially since the revenue would be used to plug a state revenue shortfall created by income tax cuts that further benefited the top 1 percent.

Rather than punish homeowners still suffering from the housing crisis and economic downturn, lawmakers should look to other opportunities to ensure the state’s tax system is able to support our schools, health care and other core public services. For instance, the state’s tax code is full of costly special tax breaks that warrant closer examination. Policymakers need to determine whether these tax breaks do the state any good or should be eliminated. State lawmakers should roll up their sleeves, dig into the state’s tax code, and truly pursue meaningful tax reform.


  1. LayintheSmakDown

    February 25, 2015 at 5:13 pm

    This actually has little to do with anything NC can change. The federal government is where you need to go for this, too bad Barry Nancy and Harry did not think about or care about adverse consequences like this when setting up these relief programs.

  2. ML

    February 26, 2015 at 9:39 am

    Make everything about Obama, seems to be the only strategy. Is he running for a third term?

    This is a state measure. The federal government in TARP and HAMP programs did absolutely nothing to require states to tax and treat write off mortgages as income of homeowners while allowing banks and lenders to continue untaxed.

    Again this is not a consequence of the federal relief programs, it is a consequence of the state at this very moment pushing these tax measures. If the state did nothing then there would be no state tax on the refininanced/written-off portion of the debt.

  3. LayintheSmakDown

    February 26, 2015 at 10:31 am

    Uhhh, who is in charge of the Federal government and the IRS? That would be Barry.
    And the federal government is taxing the gains and income on the scheme, maybe you need to study the tax code like I have. See, the state BEGINS with the federal tax numbers. If the feds did not count it as income then NC would not.

  4. Cedric Johnson

    February 26, 2015 at 11:08 am

    The federal income tax code does not require consumer relief provided via mortgage debt reduction to be reported as income for federal income tax purposes. State lawmakers are proposing making homeowners who receive mortgage debt forgiveness to add the amount of debt forgiveness to their federal adjusted income for determining taxable income for state income tax purposes. This is a state-level, not federal level, decision regarding this proposed tax change.

  5. ML

    February 26, 2015 at 1:13 pm


  6. LayintheSmakDown

    February 26, 2015 at 11:13 pm

    Forgiveness of debt is a taxable event. Just look it up on the irs web site. The state follows the feds.

  7. ML

    February 27, 2015 at 7:40 am


    The state is choosing to do this. They are not obligated just bc the irs classifies it as income too.

  8. Cedric Johnson

    February 27, 2015 at 11:17 am

    Below is a link to IRS guidance regarding mortgage forgiveness based on the federal Mortgage Forgiveness Debt Relief Act and Debt Cancellation.

    The guidance makes clear that mortgage debt forgiveness is not considered taxable income for federal income tax purposes. The proposed state tax change would break away from this federal tax code provision.

  9. ML

    March 1, 2015 at 11:19 am

    Waiting for lsd’s apology and to admit he/she was wrong and likely purposefully misleading.

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