New Law To Fix Tax Flaw

November 19, 2007

A currently proposed bill (H.R. 1876) would correct what many consumers and real estate professionals consider to be a serious flaw in our tax system. It would change the current law that forces individuals to pay an income tax when they have had part of a mortgage loan forgiven or have been forced to foreclose because of their inability to pay their mortgage payments.

In cases where home owners with only a small amount of equity have no choice but to sell their home, their stagnant or declining property values can cause them to fall short of the amount needed to pay off a mortgagee. This is called a "short sale," and is often accepted by the lender. Then the IRS steps in and demands that the forgiven amount be taxed. The current tax code requires lenders who forgive debt to provide a Form 1099 to the IRS stating the amount the borrower has been forgiven.

"How can we add insult to injury?" asked Pat Combs, president of the National Association of Realtors. "As if losing your home isn’t painful enough, to turn around and tax a family on what the government calls income is distressing. Clearly, it’s unfair to tax people on a phantom income, particularly right at the time they have experienced a serious economic loss and probably have no cash to pay the tax."

Posted in Taxes, Local Business, Lending, Real Estate, All Things San Diego