FORECLOSURE RELIEF: Tax break on house, by House - Business

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Dec. 19, 2007
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FORECLOSURE RELIEF: Tax break on house, by House

Legislators give last-minute OK to mortgage debt relief

By JOHN G. EDWARDS
REVIEW-JOURNAL

In an eleventh-hour move, Congress passed legislation that could save many foreclosed homeowners tens of thousands of tax dollars.

The House on Tuesday approved by voice vote an amended version of the Mortgage Forgiveness Debt Relief Act. The bill will enable foreclosed homeowners to avoid owing federal income taxes on any debt that was forgiven when their home was seized and sold this year -- if President Bush signs it into law. Congress was expected to recess later Tuesday or today.

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The Senate unanimously approved the bill Friday.

"By eliminating the foreclosure tax, we can eliminate one more concern faced by families already struggling to keep a roof over their heads," said Rep. Shelley Berkley, D-Nev., a member of the Ways and Means Committee, where the bill originated.

"By forgiving this tax liability, we will be helping those Americans who are suffering the most as a result of the downturn in the housing market and higher loan costs," Berkley said in a statement.

Senate Majority Leader Harry Reid, D-Nev., welcomed the House vote.

"For those who face foreclosure, the current tax rule is a cruel additional punishment. The bill heading to the President eliminates this tax penalty," a spokesman for the senator said in an e-mail.

Dennis Meservy, a certified public accountant and board member of the Nevada Society of Certified Public Accountants, had predicted a "nightmare" if the law had not been changed. The bill appears to be "a great fix," Meservy said. "That's great. That will help."

It is a particularly important piece of legislation for Nevada, which leads the nation in foreclosures. At the end of the third quarter, 2.15 percent of home mortgages in Nevada were in foreclosure, according to the Mortgage Bankers Association. The percentage of loans for which foreclosure started during the quarter climbed to 1.15 percent.

The new legislation will head off further problems for Americans who have been forced into foreclosure and had their credit rating damaged. The Internal Revenue Service can tax borrowers when lenders forgive some of their debt.

"When you borrowed the money, you were not required to include the loan proceeds in income because you had an obligation to repay the lender," according to an IRS report. "When that obligation is subsequently forgiven (by the lender), the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender."

As an example, an individual who borrows $10,000 and repays $2,000 may get the lender to cancel the remaining $8,000 obligation, the IRS report says.

That $8,000, however, is subject to income taxes, although the tax agency may not always pursue such cases. The lender must send the borrower a 1099-C form indicating $8,000 of the debt was forgiven.

The same sort of situation exists when a homeowner is foreclosed and owes more than the sales price.

That has happened to many Southern Nevada homeowners who bought houses during the peak of the housing boom with little or no down payment. In the wake of the housing market collapse, many of these homes are now worth less than the homeowner owes. On adjustable rate mortgages, the interest rates are starting rise, and many can no longer afford to make mortgage payments.

Some homeowners have persuaded lenders to let them to do short sales, in which a buyer pays less than the mortgage amount and the lender agrees not to pursue the borrower for the unpaid balance of the loan.

In other cases, the home has been foreclosed and sold for less than the loan amount. In both cases, a homeowner may find himself with additional taxable income because of the canceled debt.

Typically, foreclosed homeowners owe between $50,000 and $150,000 more than their house sells for, said Michele Johnson, CEO of Consumer Credit Counseling.

A taxpayer is in the 25 percent tax bracket could then owe $12,500 to $37,500 in additional taxes for 2007, Meservy said. Alternatively, the forgiven debt could push the taxpayer into a higher bracket, which would be 28 percent in this case, making the tax liability even higher.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or (702) 383-0420.

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Please enter your name Name: Please enter your email Email: Please enter a comment COMMENTS : (word count limit is 300) You have reached the maximum number of words allowed Current Word Count: Note: Comments made by reporters and editors of the Las Vegas Review-Journal are presented with a yellow background. noah wrote on December 20, 2007 02:23 PM: Would this be limited to 2007 or 2008 also, and would it be retroactive. Money Trees grow in Hillary's backyard wrote on December 20, 2007 12:27 AM: Bailout in Disguise? Lender "writes off" (takes deduction) for the foregiven debt, and borrower can avoid it also. BOOM Thomas L- interesting point about how this could facilitate foreclosure. Lou- refi or heloc = many do get $$$ John G- hire lawyers instead. Realtors have done enough damage! Moral hazard- interesting point. Andrea Feodorov- marry me :) Andrea Feodorov wrote on December 19, 2007 03:51 PM: Personally I think the "I'm way too smart for all of ya anyway" comment by Mr. O'Neill pretty much speaks for itself. But let's look at his argument. He claims that because a mortgagee "[doesn't] have his house anymore" and never realized a profit he shouldn't be liable for the taxes. In other words, he believes mortgagees should be liable for taxes only when they make money. He also trashes lenders for not really forgiving the debt. Well, excuse me, but if I lease an SUV for $40,000, find out I can't pay for it, return it a year later, and the dealership sells it for $30,000, you can bet they'll be on me for the balance. It's called business. In Mr. O'Neill's world, borrowers shoulder no risk for their investments. I may not be as smart as Mr. O'Neill, but I see that as polyanna. And I sure don't see why lenders would lend under such constraints. John O'Neill wrote on December 19, 2007 02:55 PM: Listen, and since it is me saying this it IS FACT: I agree that deadbeats who got houses and cannot pay for them deserve to lose the houses just as much as the people who loaned them the money deseve to not be repaid for such unsound judgement. I also think that the Feds trying to "bail out" buyers is a joke. It is not to help the buyers but the banks who fronted the money to the investors who then loaned money to buyers and it is such a small percentage of help that it is like spitting on a forest fire. But this INANE law that says you have to pay taxes on money you never actually realized is idiotic. You don't have the house anymore, or any of the money you are being asked to pay taxes on, and you absoloutley were NOT forgiven! If the lender "forgave" your debt then they would not be reporting to credit agencies that you went bad on your home loan. If they TRULY forgive the debt, and do not ruin you financially, then and only then do you owe taxes on money that does not exist. If the lender repos the house you bought for 500K, you owe 500K and the lender sells it for 400K you might owe taxes on the 100K left over, if they forgive it, and besides, do the lenders send you a check for the extra money when they sell it for MORE then you owe? If they do, you DEFINITELY owe tax on that check. Nuff said, I'm way too smart for all of ya anyway Oh by the way: how many mexicans bought homes under assumed names and had to leave them? Poor things had to change their names again... Andrea Feodorov wrote on December 19, 2007 02:28 PM: While Congress is at is, why don't they just let deadbeat mortgagees who couldn't be bothered to read the fine print on their loans live in their houses for free? No penalties. No rate increase. No threat of consequences. Hey, why not get rid of those nasty mortgage payments altogether? We can do it, after all, this is America! Of course the threat will be felt by the rest of us as taxes increase, lending dries up, homes go unsold, the dollar tanks, and we lose our jobs. But, who cares? As long as we keep those poor, math-challenged mortgagees from losing their homes? At this point, the inmates have truly taken over the asylum. moral hazard wrote on December 19, 2007 01:10 PM: can't pay for your house? no problem, uncle suga will pick up the tab. just keep spending at the mall. it's unpatriotic to save & live within your means. the grasshoppers always eat the ant in Amerika. John Gafford wrote on December 19, 2007 11:45 AM: With a foreclosure there is no debt forgiveness.The bank takes the home and can get a deficiency judgement for the difference between the amount owed and the net proceeds against the borrower. This has nothing to do with taxes, it is a straight up DEBT. Bill HR 3648 refered to by this article is designed for Short Sales. Currently the banks will 1099 a borrower the difference as income. This bill will allow home owners to waive the 1099 on their primary home. For investors you can already accomplish the same thing by utilizing IRS tax form 982 if you are insolvent (liabilities are greater than assets)- most in foreclosure are. If you have foreclosure looming, do not wait, Hire a REALTOR that specializes in short sales, and consult your CPA. For more information on this topic check us out online at LVHomePros. lou wrote on December 19, 2007 11:34 AM: Everyone knows the IRS is stupid, greedy, and unfair. Apparently it takes an act of Congress to correct the stupidity. When someone "borrows" money to buy a house then loses it to foreclosure, THEY LOSE THE PRINCIPAL PAID, but THAT'S NOT DEDUCTIBLE is it? So why should the dolts at IRS have a chance at taxing money the purchaser didn't actually receive, but that went into the house which is now worth less than what was borrowed, hence the foreclosure. How stupid. By the way, Thomas, people don't enjoy losing their homes. Do you work for the IRS? amy wrote on December 19, 2007 10:41 AM: Hello Thomas L. wrote on December 19, 2007 07:59 AM: Sorry, replace "with" with "will". Borrowers WILL more easily default on their loans, so they will do so. House prices will go down by at least 50%. Read All Comments