According to the IRS, “If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable” BUT, there are ways to avoid paying taxes on canceled debt.

 

The Mortgage Forgiveness Debt Relief Act, which went into effect in 2007, is one way to avoid having to pay taxes on canceled debt relating to your principle residence but the act is set to expire at the end of 2012. If the ACT expires, it would spell D-I-S-A-S-T-E-R to homeowners facing foreclosure by hitting them with a double whammy! . Here’s why: Let’s say you are facing a foreclosure or you want to try to do a short-sale of your home. For this example, let’s say you bought the house for $200.000 and owe $180,000 but the market is down and it’s only worth $150,000.00. If the lender forecloses on the house or accepts the short-sale and the house sells for $150,000, there would be a deficiency of $30,000. The lender will generally issue you a 1099 indicating you received $30,000 in “imputed” income and the IRS will expect you to pay taxes on the imputed $30,000. So what’s the double whammy? Whammy #1 is you lose your house in a foreclosure and whammy #2 is you would have to pay taxes on income you never actually received because the bank issues you a 1099.  

 

The Mortgage Forgiveness act currently allows you to exclude the $30,000 from your taxable income so you would NOT have to pay taxes on that imputed income relating to your principle residence. If the ACT is not renewed, not only will it affect homeowners already facing a crisis due to a foreclosure, but it is sure to have a drastic effect on the economy as a whole. If you are facing a foreclosure, call me today for a FREE CONSULTATION and find out your options.

 

Ken Parker

678-541-6770