We've all be waiting to see what would transpire and finally it appears that the vote against the phantom tax to prevent mortgage lenders from issuing a W4 for the loss they accept in a short sale, foreclosure or rescindence of deed in lieu of foreclosure has passed. As stated below in the National Association of Realtors Daily Real Estate News, homeowners who are in financial crisis will not be faced with unfair tax liability. Up until now, homeowners who lost their homes to foreclosure and short sale would be faced with a W4 for the difference in the mortgage balance and the amount actually settled on resulting in an income tax obligation. This is the best news I've heard with regard to these pressing issues caused by the reduction in property values we have experienced in the past two years combined with the increase in foreclosures across the country.
Daily Real Estate News | October 5, 2007
House Votes to Eliminate 'Phantom Tax'
The U.S. House of Representatives voted on Thursday to get rid of a tax burden for home owners who have had a loan forgiven or foreclosed on their home because they were unable to make their mortgage payments. The Mortgage Cancellation Tax Relief Act, H.R. 3648, passed by a vote of 386 to 27. Similar legislation is making its way through the Senate.
Since the early 1990s, NAR has supported such measures to eliminate the "phantom tax" on financially-strapped home owners.
“Congress made a good decision that will affect many Americans who find themselves in a truly bad situation,” says NAR President Pat V. Combs. “Changing the IRS code is an issue of fundamental fairness. It would relieve a tax burden at a time when an individual or family has experienced a true economic loss arising from the sale or loss of their home. These families are already in financial distress and are most likely unable to pay additional taxes.”
The current tax code requires a lender who forgives debt to provide a Form 1099 to the IRS stating the amount the borrower has been forgiven. This disclosure applies whether it is a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement that relieves the borrower of the obligation to pay some portion of their debt. If the property is sold at foreclosure or is sold for less than was borrowed, that difference is considered income and is subject to the tax.
H.R. 3648 would ensure that any amount forgiven on mortgage debt secured by a principal residence will not be taxed. The legislation has a provision to safeguard against abuses. That provision is similar to one that already exists for commercial real estate owners and would treat commercial and residential property equally.
"This is not only about the subprime turmoil we are currently experiencing," Combs says. "This is also about families who have lost their home or a need to sell that home for less than the amount owed on their home mortgage because of job loss, divorce, health issues, a decrease in the value of the home or other unfortunate circumstances. Clearly it is unfair to tax people on phantom income when they most likely have no cash with which to pay the tax."
In other news, another bill has been sent to the House Judiciary Committee that would revise the bankruptcy code to allow judges to order mortgage lenders to ease terms for home owners in bankruptcy proceedings. Currently, mortgage lenders can foreclose against a home owner in default 90 days after the filing of bankruptcy.
— REALTOR® Magazine Online
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