I read a column in the Business Today section of the Boston HERALD on Sunday, March 13, 2011, which I found both upsetting and surprising and not in accord with my prior understandings. Perhaps, some of you also read Kenneth Harney's column on the real story of the treatment of debt forgiveness by the Internal Revenue Service, when there is a short sale or foreclosure. To be perfectly honest, I was more shocked than anything else to discover that there were real "strings" to debt forgiveness, even if the property involved is, or was, your personal residence.
There is an exemption for excluding the amount of debt forgiven from being counted as ordinary income but only to the extent that the debt involved was used to "buy, build or substantially improve your principal residence". What this says to me is that if you, at some juncture, refinanced your home to pay off credit card debts or buy a car or pay tuition, the amount of money so used for that purpose may be treated as ordinary income by the IRS, when you obtained relief form that debt.
Many people took advantage of rising home values to take money out of their home for various purposes. If those purposes did not fit into the definition set forth above, those very same people may be looking at some serious tax consequences that they had not considered when they let their home go to foreclosure, or worked on a short sale.
I am not a tax attorney; I am a real estate attorney. This post is not meant to provide tax advice. You should consult your own tax advisor for tax information. I just thought that the information contained in Kenneth Harney's article is relevant to us, as real estate professionals, and may affect our clients. It is for that reason alone that I thought it appropriate to bring the column to your attention
Comments (9)Subscribe to CommentsComment