Will I Owe Income Tax on “Forgiven Debt?”
2007 Mortgage Forgivenewss Debt Relief Act is Now Law
On Thursday of this week President Bush sign this bill into law. One of the provisions is that homeowners whose homes are lost through foreclosure or short sale will no longer owe income tax on the forgiven debt.
Forbes.com says,
“The Mortgage Forgiveness Debt Relief Act of 2007 will help people who have lost their homes through foreclosure or whose lenders have forgiven some of their mortgage debt so they can keep their homes.
“Ordinarily, when someone is relieved of a debt, the amount forgiven is considered taxable income.
“People who didn’t have the money to meet their mortgage payments have found that they owe income taxes on tens of thousands of dollars,” Luscombe observed. For example, if a bank forecloses when the borrower owes $400,000 on a home and then sells the property for $310,000 in full satisfaction of the debt, the borrower will usually owe tax on $90,000.
“It seems like the tax system is kicking them when they’re down,” Luscombe said.
“The new law excludes discharges of up to $2 million of indebtedness from taxation if the debt is secured by a principal residence and if it was incurred in the acquisition, construction or substantial improvement of the principal residence.”
Please consult your tax professional about how this new law might affect you.
My Friend, Richard Zaretsky, Esq. of West Palm Beach, FL has written an excellent post on this subject. He writes,“For those of you that aren’t up to speed on the downside of a short sale, if the bank lends you $100 and you end up only having to pay back $75, then by keeping the $25 you have to declare that $25 as ordinary income. You see, borrowing money is not taxable as income. But if you don’t have to pay it back, then it is no longer a loan, and instead it is income, just as if you (oh my gosh!) worked for it.“This new law is not going to give relief to flippers that have flops, or investors that over financed, or even homeowners that leveraged up their loans after acquiring the house. “ (Read his post here)
(copyright 2007 by Dan Forbes, All Rights Reserved)
