There has been much publicity lately about the increasing number of homes going into foreclosure. Much of this has been blamed on the sub-prime mortgage crisis which offered below market financing to people with less than ideal credit scores. Now that these adjustable loans are resetting with higher interest rates, the monthly payments are becoming too expensive. Since home values are not appreciating, many people now owe more money on their home than what it is worth, especially if they have refinanced and taken money out of the house.
The House Ways and Means Committee has passed a bill that would eliminate the tax burden on real estate for the debt that would be forgiven. What did he just say?
For instance: if you purchased your home with 100% financing and paid $600,000 a year ago, but can now only sell it for $550,000, the lender would have to approve a short sale provided you did not have the $50,000 to pay off the loan. If this happened the lender could send you Form 1099 indicating that he $50,000 was debt relief (income in the eyes of the IRS) and therefore you would apply your tax bracket percentage to the amount forgiven and wa la, you would owe that amount in additional income tax
Why is Debt Forgiveness a Bad Idea?
Actually you have to commend the federal government for their altruistic taxpayer concern. That does not happen very often. However the proposal of debt relief for the record number of homes that are predicted to be sold either through foreclosure or short sale will act to further depress the housing market. If a homeowner faces no penalty, then there is absolutely no incentive to maintain value. The focus shifts from trying to sell the home at market price and avoid paying taxes, to selling the home at any price just to get rid of it. Where is the fairness for the other homeowners in the neighborhood who manage to pay their mortgage and the property taxes?
Granted, there are some people who have a true hardship which this bill is designed to help. But what about the folks who spun the wheel hoping to make a quick buck and got caught? The net result is the majority of people this will affect got into this housing market with no money of their own. It was 100% financing, and 100% of the liability was incurred by the bank. Now they can be bailed out with a 100% get out of jail free card, no liability and no risk.
The bill may go through several revisions before the President has a chance to sign it, if he signs it. But the atmosphere in Washington seems to be focused on doing something. We will just have to wait and see.
Maybe the IRS could include a note to those affected saying something like: “Thank you for your participation in the housing market, you’re free to go.”
(The intent of this article is not to give or provide tax or legal advice. Please check with your own attorney or CPA)
About Doug Willis
[...] Doug Willis placed an observative post today on Is HR 3648, The Mortgage Forgiveness Debt Relief Act of 2007 A ….Here’s a quick excerpt:If this happened the lender would send you Form 1099 indicating that he $50000 was debt relief (income in the eyes of the IRS) and therefore you would apply your tax bracket percentage to the amount forgiven and wa la, you would owe … [...]