Tax Relief for Foreclosure Victims

April 10th, 2008 | Tags: Foreclosure Victims

Previously if the house owner facing foreclosure managed to come to an agreement with the lender by which a portion of the debt would be forgiven, this amount was taken to be income by the tax authorities and accordingly charged. But the newly passed Mortgage Forgiveness Debt Relief Act of 2007 has put an end to that injustice. But the many critics allege that sufficient steps have not been taken to let the people know about it. The ordinary man, embattling foreclosures, is still in the dark about how one may qualify for availing of its benefits.

Suppose the foreclosing lender is owed $250, 00 but permits the borrower to sell the house for $200,000 and writes off the balance of $50,000. But the government took this latter non-existent amount to be income and accordingly slapped down a tax. So in the end the borrower finds that dispossessed of a house he or she is now possessed of tax dues! Now that clause has been cancelled provided certain requirements are met. The law applies only to the houses affected from 2007 to 2009. Secondly the house has to be the primary residence of the borrower and thirdly the borrower’s loan must be less than $2 million. Previously for tax to be forgiven the borrower had to show that the person was insolvent – the debts were in excess of assets. It was a cumbersome process to prove insolvency. Very people could navigate through the maze of work involved – least of all people in the low and medium income bracket traumatized by foreclosures.

Housing counselor Lynette Briggs comments that many of her clients drawing heavy salaries could not prove that they were insolvent. But that does not mean they could not get into a tough financial bind. Apparently it seems that someone with an annual salary of $1000, 000 should not have problems. But on the other side of the scale with a monthly mortgage payment of $3,500 and the responsibilities of children in college etc, foreclosures can knock anytime.

The focus on foreclosure tax debt arose only when the real estate market bubble burst and the foreclosed houses came to of less value than the amount of the loan. Previously there were very few such instances. But even after it has made its debut the general complain it is couched in too complicated terms to benefit the common man cornered by foreclosure.