So, you’re about to lose your home to foreclosure.
You talk with your lender, and it agrees to let you sell it, instead.
Because of market conditions in your neighborhood, you end up selling it for less than you owe to the lender.
But, you’re lender says, that’s okay.
So, you’re in the clear, right?
For example, say you owe the lender $400,000, but you’re only able to sell your home for $350,000. You give the proceeds to your lender and it says, “You’re all set, you don’t have to pay us the rest … but, get lost.”
Trouble is, the Internal Revenue Service doesn’t like that.
To them, the $50,000 debt forgiven by the lender is basically “taxable income”.
So, you’ll owe taxes on that $50,000.
What do you think of that?
Over the past couple of months, some members of Congress have suggested changing the tax law so that people in this situation end up not owing any tax. The idea being that it only adds insult to injury. More and more homeowners are entering into foreclosure, and we need to get them back on their feet, not hit them while they are down.
Congress has estimated that the IRS would collect up to $2 billion in income taxes, over the next ten years, under current tax law.
There’s more to this, however. It’s not as if everybody who loses their home encounters this situation.
If someone loses his or her home and is basically penniless, then their loan debt is “forgiven” and they don’t owe the IRS anything (consult your tax adviser …).
The tax law, as I understand it, only requires tax payment from those who are otherwise financially solvent. Basically, I guess, someone who can’t afford to keep paying his or her mortgage loan, but has money to pay rent, etc.
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