Kenneth R. Harney of the Washington Post has written a disturbing article about what happens when consumers work out a new deal with their mortgage company that involves forgiveness of principal. Here is the introduction to his fine article:
For homeowners who are seriously delinquent on their mortgages and hoping for relief, the Internal Revenue Service has bad news: If your lender agrees to modify your loan and forgive any of your debt, you could owe federal income tax on the amount forgiven.
Think of it as the tax code’s “kick ’em while they’re down” rule.
We think the conclusion of his article (which you should read in its entirety) is excellent:
Proponents of the debt-relief bill argue that short sales, mortgage delinquencies and foreclosures are painful situations for most homeowners and that there’s no public policy purpose served by smacking them with tax penalties that make things even worse. In the case of below-market short sales, for example, most homeowners have already suffered sizable capital losses that are not tax-deductible. They’ve lost thousands of dollars in equity.
Why pile on?
The outlook for the bill: It’s currently before the House Ways and Means Committee, Congress’s primary tax legislation body. Because most of the majority-Democratic housing and banking committee leaders have called on banks and mortgage companies to work out solutions to keep troubled homeowners out of foreclosure, a bipartisan tax fairness bill like this one should have a reasonable chance of passage.
Well said. Given the possible tax implications, we suggest you consult with an experienced attorney or tax advisor before making any modification to your loan so you fully understand the true value of cost of the modification.
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