Back in April Congressmen Robert Andrews (D-NJ) and Ron Lewis (R-KY) introduced a bill to the House of Representatives called The Mortgage Cancellation Act of 2007 which called for the elimination of IRS tax penalties on “debt relief income” as it relates to the sale of your home. This is a substantial change to the existing tax code aimed a providing people who sell their homes in a short sale situation relief from additionally-incurred income tax. The bill has been referred to the Ways and Means Committee for review.
To amend the Internal Revenue Code of 1986 to exclude from gross income of individual taxpayers discharges of indebtedness attributable to certain forgiven residential mortgage obligations.
Current IRS code requires debt relief to be taxed as gross income. If you sell your home but are unable to sell it for an amount more than the existing mortgage on the property your lender is supposed to issue a 1099 to you in the amount of the difference between the mortgage and the short sale amount. This dollar amount then becomes taxable as gross income and must be included in earnings calculations for the year in which the relief was provided.
This bill is in the first step in the legislative process. Introduced bills go first to committees that deliberate, investigate, and revise them before they go to general debate… and may undergo significant changes in markup sessions. The majority of bills never make it out of committee.
- NAR seeking stories to support proposed Mortgage Cancellation Relief Act of 2007
With pressure on lenders to allow short sales to assist burdened homeowners, the forgiven debt can create a tax problem for the seller.
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. That disclosure applies whether it is a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement that relieves borrowers 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.
What’s your take on it?
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