The IRS Forgives Until December 31, 2009

Real Estate Agent with Fathom Realty DC-VA-MD

If being in default and the threat of foreclosure aren't troubling enough, the thought of the IRS coming around after the fact is sure to keep sellers up all night.  They have all heard the stories of being tracked down by the tax man to pay taxes on "forgiven debt."  To them it's like a bad dream turned into a nightmare, all summed up and justified by a bunch of letters and numbers.  But not every code section is necessarily a 4 letter word.

Code Sec 108(a)(1)(B),(C) - better known as 1401, means everything to some homeowners in today's market ... but it only has meaning in light of HR 3648.  Then again, Section 163(h)(3)(b) is really the key to the whole thing.  Make sense to you?

It doesn't to your homeowners either.  Staring foreclosure in the face they want to know if there is anything they can do.  Can you sell their house before the deadline?  In most cases your answer would be no because they are completely "upside down" but there are cases in which a short sale could work.  And when you broach that subject one of the first questions they may ask is "what is our tax liability if we agree to a short sale?" 

While the correct response is that you are neither a tax lawyer nor a CPA, you need to be able to let them know that if they qualify there are some options that may resolve that issue.  And it all ties back to December 20, 2007, when President Bush signed into law a new measure giving tax breaks to homeowners who have mortgage debt forgiven.  With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence. 

Why is this so important?  In most instances,  debt that is forgiven or cancelled by a lender must be included as (ordinary) income on the seller's tax return and is taxable.  There are a number of terms within the bill that are central to the issue, such as "Acquisition Indebtedness" - and you need to know them. 

And don't forget December 31, 2009.  That's the date when this tax break expires.  It only applies to debts discharged from January 1, 2007 to December 31, 2009.  And tell your sellers that "being insolvent" as a result of bankruptcy doesn't count.  The Short Sale is a powerful tool in the hands of a qualified real estate professional.




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R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham
Bank of England (NMLS#418481) - Raleigh, NC
Bob Mitchell (NMLS#1046286)

Talk about adding insult to injury!  You lose your home and then the government piles on...doesn't seem fair!  At least not as long as the Bear Sterns of the world are being bailed out.  Using the IRS's logic, maybe all of the shareholders of Bear Sterns needs to pay taxes on the money that they lost with JP Morgan bought them out??


Bob Mitchell

ValueList Real Estate Services, Inc. 

May 02, 2008 09:17 AM #1
Jonelle Simons
Windermere Real Estate - Park City, UT
Great advice... It seems pretty unfair.  Everything will work itself out though... things are looking up here already!
May 02, 2008 09:40 AM #2
Blake Cesarz
GainClients Inc. - Tucson, AZ
The tax break was a terrible idea, it is only going to cost more in the long run. We can't improve things by treating symptoms, we have to attack causes.
May 02, 2008 09:54 AM #3
Frances C. Rokicki
Fran Rokicki Realty, LLC - Bolton, CT

Good information to have on hand.  I'm saving this one, thanks!!

It's a Good Life!


May 05, 2008 12:10 PM #4
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Boris Miric

Realtor (Licensed in DC-VA-MD)
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