New Year's Warning: Housing Recovery Threatened As Tax Break Lapses

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A tax break enacted at the start of the financial crisis to help Americans whose home values have dropped sharply comes to an end tomorrow because Congress didn't extend it.

Starting January 1st, principal reductions and loan modifications will be treated as taxable income.

Congress temporarily waved those taxes, in an effort to help struggling homeowners stay in their homes or sell them without getting hit with a tax bill.

The measure targeted “underwater” owners whose home value has fallen below the value of the mortgage. 

Housing research firm CoreLogic estimated that more than 6 million homes were underwater in the third-quarter of this year. 

Analysts worry that with the incentives now lapsing, the recovery of the housing market could be threatened.  "A loss of this tax break would be a negative for housing," wrote Jaret Seiberg, a financial services policy analyst with Guggenheim Partners.