Yesterday, The Mortgage Foregiveness Act of 2007 was passed effectively getting rid of the question, “will I be taxed on a short sale?”
Prior to this action, the forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure was potentially taxable to the borrower. As agents we always have had to warn our clients in short sale positions about the potential of receiving a 1099 from the shorted mortgage lender, thus triggering a potential tax. In one situation I’m involved in, the potential deficiency is 1 million and the tax hit would have been devastating.
Now however, those owners in that situation, at least until 2009, are having their taxes waived, too (at least up to 35%). For those in this situation, this is really great news and likely the best holiday present they could hope for.
On their behalf, thank you congress [photopress:applause.jpg,thumb,alignright]
This makes me mad as hell. Now we change the rules to bail out the idiots who got in over their heads. I’m sorry, but forgiven debt should be taxed as income. Nice subsidy for greed and stupidity. The IO ARM gamblers now get to walk away clean, with only trashed credit to show for it. I have no pity for these people.
Unintended consequences? Prepare for a MUCH higher rate of default. The USPS will strain under the weight of all of the keys mailed in with the Alt-A ARM crop this spring. This will speed up the collapse and guarantee that 2008 is truly horrifying.
I certainly hope that they do not try to tamper with FICO ratings in the future, and allow the millions of deadbeats with soon-to-be-scorched credit another pass. These people should not be able to qualify for a Sears card, they must suffer in some way for their foolishness. They are welcome to save up and buy their next home with cash.
Now it’s up to W. to do the right thing and let the banks who are on the hook for all of this FAIL. Let the chips fall where they may in this wave of deflation.
With no tax liablility, people who are under-water will have no incentive to get the best price they can in a short-sale situation (thus limiting the tax burden). They will then price for the quickest sale. (meaning low price). As such, this will only accelerate the decline in housing prices.
What a deal for the borrowower. Some people will have bought a house with no money down, cash-out refie’d tens of thousands of dollars, and then walked away with no tax implications. Free money!!! What a great deal for the risk-taking speculator. Moral hazard at its finest.
Of course, their FICO score takes a hit, but these types probably didn’t care about it anyways…
With no risk to borrowers, banks will charge more for lending. Interest rates and required down-payments are going up, regardless of what the fed does.
“these types probably didn’t care about it anyways…” I can’t let that go unchallenged.
These types are all types who have gotten into trouble, but why are you assuming it’s greed and stupidity. Try solving problems when you lose a job due to a recession, mother gets sick, etc, etc. To not risk, means you will never get ahead. Do you honestly think that ‘these people’ get in this trouble on purpose?
For example: my party: buy a property, lose a major inceome contract, get a separation, one party walks, takes all the furniture and leaves other party to solve it all alone with payemnt in the 15000 a month range. What do you want her to do? Sell drugs?
LiFe happens, *!?* happens.
Yes, life happens. People need to remember that when they sign on the dotted line to buy that house. Taking a risk means that you might lose. Taking a big, stupid risk means you probably will lose.
The market will eventually fix itself if the gov’t keeps out of it and stops messing it up even more.
Welcome to Life…we make choices and we live with them.
Our country has always had a history of helping people in need.Some have a job, buy a house, get upside down and can’t fix it and some never get a job, end up on the street, never risk anything and we help them. Don’t forget that the lendors rarely rarely sent the 1099 so the government isn’t losing any taxes that they ever got anyway. So the public is helped by this taxation waiver by potentially saving people from BK where they don’t pay any bills at all. Isn’t this the lesser of the evils, devil?
Eileen — this is how we treat children, not citizens. The rules and the stakes were clear enough going into this mess. It’s sickening that we are easing up on the speculators now. Nolaguy is correct that this will only make MY loan cost more later. Gee, that’s just great.
Oh, but they wanted the American Dream! And they needed to Buy now before being Priced Out Forever! Forever! That’s a long time. Did some REALTOR® tell them this? Bidding war!
Again, watch out for the unintended consequences — foreclosure statistics that dwarf the already-shocking 2007 numbers.
You people are really missing two points.
First, the sale of residences is generally exempt from being taxed, so this isn’t that different (although I’m not sure the same dollar limits are involved). But if the property were foreclosed, and the lender bid in the entire debt, the result would be the same. So this largely only applies in short sales (or where the lender bids in less than the debt).
Second, most of these people wouldn’t be taxed under the current law in any event, because they’re probably insolvent (which is an exception to discharge of indebtedness income). This just saves them the difficultly of proving that twice (once to the mortgage creditor who forgives the debt, and the second time to the IRS–which do you think is going to do a better job determining that????).
Not really a big deal. If anything it just saves the IRS some time and makes them more efficient.
Christian wrote: “Unintended consequences? Prepare for a MUCH higher rate of default. The USPS will strain under the weight of all of the keys mailed in with the Alt-A ARM crop this spring. This will speed up the collapse and guarantee that 2008 is truly horrifying.”
You’re really overestimating the intelligence, knowledge and planning that people do.
Back before the sale of residences was largely exempt, a lot of people were in serious tax trouble because of their having rolled over gain from residence to residence (which meant their basis was often far less than their debt.) But almost no one knew or understood that.
Once I even had the privilege of speaking to someone at the IRS that was responsible for drafting a regulation on the effect of a bankruptcy trustee abandoning property. The person writing this regulation was doing so in a way that would result in the tax being less likely to be paid, but didn’t have a clue what they were doing because they didn’t understand the bankruptcy system. This was a professional, probably an attorney with a masters in tax. And they didn’t understand enough to change what they were doing. Do you really think the average homeowner is going to change what they do based on this legislation? Very unlikely.
And if they do change what they do, it will be to try to do a short sale instead of being foreclosed. That’s not a bad thing. As I’ve said in another thread, the banks need to wake up and realize that they need to process some short sales in a better fashion. It’s in their interest just as much, if not more as it’s in the interest of the homeowner.
One final point. If the short sale occurred because of a refinance, where the owner was upside down because they pulled out money, that would be a bit different than if the short sale occurred because of a purchase money security debt (or the refinance in the same amount of purchase money debt). In the refinance for extra money case, arguably they got unrecognized income earlier, but in the purchase money case the only reason they’d be taxed would be because the loss on the sale of a residence is not recognized as a loss. They never really had unrecognized income.
Yes, those cash out refi’s bother me, too. I took one party through a short sale where they’d just pulled 40,000 out and the bank ate it. I don’t know if they ever got a deficiency judgement since they moved sites unknown. They probably learned a great scam in the process.
Two ways out.
IRS does have exceptions
-In the even of a bankruptcy discharge, the forgiven dept can be included in the bankruptcy.
-If the seller can prove his liabilities exceed his assets. The seller will have to come up with evidence of this to IRS when taxes are done.
Didn’t know you could discharge IRS debt in a BK. I don’t think you can discharge employer payroll tax debt, though. Can you?
Of course, now it’s a moote point since the tax bill passed and all taxes are forgiven on deficiencies from Short Sales thru 2009
If the debt is already forgiven, it doesn’t need to be included in the bankruptcy. But you could simply not ask that the debt be forgiven, and then discharge it in a bankruptcy if this new statute doesn’t become final, and that should probably deal with any tax issues.
You can discharge certain IRS income tax debt in a bankruptcy,and there are a number of rules, but generally they have to have been due at least 3 years before the bankruptcy was filed. And no, the withholding portion of payroll tax debt cannot be discharged.
The new tax law was signed into law by President Bush on Friday.
Hi Eileen – For the people that really need this type of relief, I am happy for them. There is nothing worse than losing your home and then having that little extra slap in the face at the end of the year come tax time.
Unfortunately, there are also a lot of bad seed that will take advantage of this and slow our market down a bit…
Thanks for the update!
The Patriotic Mortgage Repayment act of 2008 could change all this. Mortgage defaulters should be required to repay 105% of the cancelled debt to the US Treasury.
Sure these deadbeats had problems making loan payments on the full balance, but should have no problem after the balances are reduced by the value of the collateral.