IRS - The "Kick 'Em While They're Down" Rule

By
Real Estate Mortgage Broker with Cognicorp Mortgage Banking Advisory

In his weekly syndicated column, Kenneth Harney pulled back the curtain on a nasty piece of IRS tax code that can penalize homeowners with foreclosures and short sales. 

Because the IRS treats canceled debt as ordinary income, homeowners that "work something out" with their lender may inadvertently add tens of thousands of dollars to their annual tax liability.

According to the tax code, when a creditor agrees to cancel a personal debt of $600 or more, it is required to submit a 1099-C, Cancellation of Debt form to the IRS.  And, when the IRS receives this form, it treats the canceled debt as income.

So, if your mortgage lender agrees to "forgive" $40,000 on your mortgage in a short sale, you are required to report that $40,000 as income to the IRS -- even though you never physically held the $40,000.

This is how a person's tax liability can dramatically increase.  Imagine if you were taxed on $40,000 that you never "earned".

Capitol Hill is taking steps to offer relief to homeowners by modifying the tax code related to cancellation of debt. 

The Mortgage Cancellation Tax Relief Act of 2007 would amend the tax code to forgive debt cancellations on primary residences and is currently before the House Ways and Means Committee, the primary tax legislation body of Congress.

 

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Rainmaker
181,513
Sara Bonert
Real Estate Internet Marketing
Zillow

First all, what number are these people calling to get their mortgages forgiven because I would like it....  :) 

I have been reading a lot about this lately.  If you are basically "given" $40,000 of income, I do think tax should be paid on it.  Although if you are in a situation where your debt is being forgiven, you probably don't have a lot of extra money to pay this laying around, but you are also probably in a lower tax bracket.  However, I still think the homeowner should be responsible for the taxes. 

May 11, 2007 03:11 PM
Anonymous #30
Anonymous
Anonymous

It also includes bankruptcy and probably. The IRS is going to want it's share of all forgiven debt. Nice Guys!

 

May 11, 2007 03:25 PM
Rainer
122,017
Christy Powers
Pooler, Savannah Real Estate Agent
Keller Williams Coastal Area Partners
I did not know this. It's funny cause this is actually very pertinent to a customer right now.
May 11, 2007 06:00 PM
Anonymous #32
Anonymous
Anonymous
Since it could or could not affect the seller, its best to point them in the direction of a tax professional for the clarity and updates.
May 11, 2007 06:20 PM
Rainer
15,978
Robert Cramer
Five Star Property Inspections
Darn....now i'll have to get a home equity loan to pay my taxes......wait....I don't own the home anymore.  I really hope one of our great Presidents steps up to the plate and reforms the tax code......one needs a law degree to pay their taxes.....sad, very sad.
May 11, 2007 09:52 PM
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Rainer
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Tony Gallegos

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