Real Estate
Tax Relief for Borrowers Facing Foreclosure
Normally, if a borrower has a debt discharged or otherwise forgiven without adequate consideration, the IRS will consider this a taxable event. The borrower will have income - at the time of foreclosure - if the total amount of the debt owed is greater than fair market value of the property. A short sale could also trigger income to the taxpayer. In the current falling market, borrowers often face both of these scenarios. For more details on the calculation, click here.
However, the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648) temporarily resolves this problem. The new law allows taxpayers to “exclude income from the discharge of debt on their principal residence.” Congress applied the Act retroactively to debt forgiven in 2007 and remains effective through 2009.
The Act does not decrease the number of foreclosures, but it does prevent further burying a distressed borrower with a tax bill after they lose their home. The question remains how much this exclusion will cost and who will have to pay for these lost revenues. It is likely that much of the cost will be made up through revenues from a higher number of foreclosed second homes and investment properties that do not qualify for the exclusion.
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2 comments for “Tax Relief for Borrowers Facing Foreclosure”
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Its not fare that if a borrower has a debt discharged or otherwise forgiven without adequate consideration, the IRS will consider this a taxable event and the borrower will have income at the time of foreclosure
Will the bill passed help someone who is a single parent,that is barley hanging on and has been on the verge of forcloser, but still struggling really hard to keep my home.