Lose Home, Pay Taxes

Tax Law

Posted Aug 20, 2007, 07:33 am CST
By Debra Cassens Weiss

Some homeowners who lost their homes in foreclosure are facing bills for unpaid income taxes on the forgiven debt.

The so-called 1099 shortfall results in a tax bill when the value of the house is less than what is owed on the mortgage, the New York Times reports. The homeowner can be excused from taxes on the forgiven debt, though, in cases of bankruptcy.

Some homeowners are fighting the tax bills and winning; others are negotiating lower payments, the newspaper says. Lawyers representing homeowners are contending they are not liable for the taxes because of insolvency or because the mortgage lender inflated the home’s original value in a flawed loan process.

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Posted by Charlie Bunn - 1 year, 3 months, 1 week, 4 days, 9 hours, 35 minutes ago

WAY past tim eth support the FAIR TAX
Posted by Patrick Hinchey - 1 year, 3 months, 1 week, 2 days, 7 hours, 7 minutes ago

Taxing in this foreclosure situation is as idiotic as the fair tax proposed by the libertarians (think neo-conservative pipe-dreamers fooled by the likes of a true hidden agenda). The fair tax won’t work, is unconstitutional, and would put the country in more dire straights than it is already in. Propaganda aside, there is not a serious chance of it ever happening.
Posted by Heather A. Kmetz - 1 year, 3 months, 1 week, 2 days, 6 hours, 43 minutes ago

This tax law makes perfect sense; and is fair. Let’s say your rich uncle loans you money and then says, “forget about it” and you don’t have to pay him back. This tax law requires that loan to either be recharacterized as income to the recipient or as a gift by the lender. Without this tax law, you would have a HUGE gaping loophole in our income, gift and estate tax law system. Now, in this instance, when buyer borrowed money from a bank to pay to seller in exchange for a home. The tax law still makes sense. The bank is actually out the money it loaned and in order to write it off its books as bad debt, it needs to report it as income to the buyer (who actually received the money and paid it over to the seller). The problem is not in the tax law. If there is a problem, it is with the law governing lending practices. Whether or not you believe there is a problem depends on your point of view—should we protect people from themselves as a matter of public policy (e.g. by limiting loans to a percentage of appraised home value, by capping adjustable mortgage rates or limiting permissible lending vehicles)... or do we give people the unfettered right to make decisions on your own (even if they are stupid) and let the market govern appropriate lending practices. I lean toward the protectionist side of the pendulum and would favor legislation that would forgive the tax bill for these people who have lost their homes—but that doesn’t mean that the tax law is flawed.
Posted by A. Renee Pobjecky - 1 year, 3 months, 1 week, 2 days, 6 hours, 30 minutes ago

Thank you Heather for your insight. I did not understand the rational behind this situation but reading your post changed my mind.
Posted by Jorge Hernandez - 1 year, 3 months, 1 week, 2 days, 6 hours, 23 minutes ago

The law seems inconsistent. If a homeowner sells and makes a profit there is an exclusion of 250k per person, but if they lose money they pay taxes on money that they do not have. Moreover, the tax law applies to forgiven debt, and in many states there are single-action rules which allow the bank to either take the property in foreclosure OR seek a deficiency judgment, but not both. So, if there is no ability for a bank to impose a debt on a foreclosed upon borrower, then how can that debt be forgiven?
Maybe the 250/500k exclusion for capital gains should be applied to gains and losses. At least that way there would be relief for the homeowners on their personal residences, and the legal wrangling could be limited to non-owner occupied housing.
Posted by Tom Holmes - 1 year, 3 months, 1 week, 2 days, 6 hours, 17 minutes ago

I don’t think Kmetz’s analogy holds water. If someone loans you money and forgives the debt, then you still have the asset-the money. If a bank forecloses, they have the asset. The borrower has not had any realized gain or income. The borrower has also given up future appreciation, mortage interest tax breaks, other considerations like credit worthiness. Taxing them for ‘phantom income’ seems a cruel cut to me
Posted by Dan Luker - 1 year, 3 months, 1 week, 2 days, 2 hours, 39 minutes ago

Heather Kmetz wasn’t stating an analogy, she was explaining the why a debt that is forgiven is construed as income by the tax system. The example she used is in every tax textbook in every law school. I learned it that way and I don’t practice tax. The problem really is with the subprime lenders.
Posted by Marian - 1 year, 3 months, 1 week, 1 day, 20 hours, 12 minutes ago

Bet the Bank, which now owns and possesses the asset doesnt have to pay taxes on it. They probably claim a loss because of the managment costs. This is totaly a screw the little guy situation or “Rob from the poor to pay the rich” but then that is prety much where all the fortune 500 companies older than 50 years came from now isnt it?

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