Law erases penalty in debt forgiveness
By Helen Huntley, Times Personal Finance Editor Published January 6, 2008 Homeowners whose mortgage lenders allow them to walk away from their debt got a big break from the new Tax Increase Prevention Act just passed by Congress. Under the old law, debt forgiveness was considered taxable income in many cases - pretty painful stuff when the reason you couldn't pay your mortgage was because you didn't have the cash. Now forgiveness of debt or resetting of terms will not be taxable if the debt was taken on to buy, build or substantially improve your primary residence. A cashout refinancing is not eligible to the extent that it exceeds the original mortgage amount. "This is much needed," said Scott Stamatakis, an owner of Unity One, a Tampa real estate company that specializes in "short sales," deals in which desperate homeowners sell property for less than what they owe on the mortgages to short circuit foreclosure proceedings. For the deal to close, the lender has to agree to accept the buyer's bid as payment for the mortgage. These situations have become more common as real estate prices have dropped. "It's almost an insult for a person to be in a financial bind such as foreclosure and then, when it's over, not only did they lose the house but there's an extra $50,000 to $100,000 income they have to report. It's like being kicked when you're down." Stamatakis said lenders typically have written off the remaining debt rather than chasing the borrower for the deficiency. The result was taxable income for borrowers unless they could show they were insolvent at the time. But if they had a positive net worth (what they owned was worth more than what they owed), they were out of luck. The law also will benefit people who stay in their homes under "workout" arrangements in which lenders agree to change the mortgage's terms to make them more favorable to the borrower. The Bush administration's plan for freezing the rates on certain adjustable rate mortgages is one example. If the law had not changed, the deals would produce taxable income. Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.
Tel: (877) 255-1074 - Fax: (800) 291-4555
|
Homeowners
whose mortgage lenders allow them to walk away from their debt got a big
break from the new Tax Increase Prevention Act just passed by Congress. Under
the old law, debt forgiveness was considered taxable income in many cases
- pretty painful stuff when the reason you couldn't pay your mortgage was
because you didn't have the cash.
