On September 26, 2007, The House Committee on Ways and Means unanimously approved H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007. For more information, please see THIS ARTICLE. This is good news for the clients of ours that go through a short sale of their home. Under current law, the homeowner would receive a Form 1099-C in the amount of the forgiven debt, being responsible for income tax on the amount of debt written off. This is adding insult to injury in many cases, and should be stopped to help our economy get trhough this horrible foreclosure market we are seeing.
We urge you to write to your congress person to let them know you want them to SUPPORT this bill when comes around for vote. To read a summary of the contents of the bill, click here: Summary of the H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007.
If you are interested in seeing other letters of support on this issue from the National Association of Realtors, National Association of Home Builders, and Mortgage Bankers Association, please CLICK HERE.
It is difficult to tell someone that they will avoid the foreclosure but be responsible for several thousand dollars worth of taxes because of it; like a double edged sword in many cases. There are ways around the tax liability, but not everyone qualifies for these exemptions. They are listed here: (reprinted from the IRS website, for the full page of FAQ on Mortgage Debt Cancellation form the IRS, please follow THIS LINK):
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
- Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
- Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
- Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
- Non-recourse loans:A non-recourse loan is a loan for which the lender's only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.
I hope this helps answer some of the questions I have been receiving. Please help pass this bill along into law as it would certainly be a bold first step in helping to get our downturned economy back in check.
Any comments on this are welcome.
John Youker
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About debt forgiveness... IF you are a speculator or flipper and have just made bad decisions ( but pocketed some money on others) why should you get off of the hook tax wise?
The average homeowner that goes through foreclosure will probably end up in bankruptcy court and so they can very easily demonstrate insolvency (in most cases). I think this is just another case of the politicios playing to the chior.