Gov’t Passes Tax Relief for Borrowers in Foreclosure
December 26, 2007
Pres Bush signed into effect H.R. 3648, the “Mortgage Forgiveness Debt Relief Act of 2007″
http://www.whitehouse.gov/news/releases/2007/12/20071220-6.html
This law would eliminate a taxable gain on borrowers who received a forgiveness of debt from a lender in a short sale. Normally, if a lender forgives the debt, to this extent the homeowner would have a taxable gain. HR 3648 would eliminate this “phantom income” on a borrower’s principal residence. The law applies to all ACQUISITION (not refi) debt forgiven from Jan 1, 2007 and on.
This is an EXTREMELY SMART move on the part of the government, FOR ONCE! To make up some of this income, the law also amends the capital gains rules principle residences by denying an exclusion of the gain that is allocable to a nonqualified use of such residence (i.e., use other than as a principal residence).
Entry Filed under: Bill Bronchick, William Bronchick, foreclosure, real estate. .
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1.
blueoceancs | December 26, 2007 at 11:11 pm
Let’s see if I understand this correctly:
1) e.g. If a borrower initially purchased the home 10 yrs ago for $75K, then kept using his home as an ATM by repeatedly refinancing. At the end, say he owes $200K and was foreclosed. The bank managed to sell it for $95K, taking a $105K lost. 1099C was issued, but the borrower walked away free and clear anyway…
2) e.g. If an investor purchased a income-producing property 3 yrs ago for $270K. He couldn’t make the mortgage, but did manage to do a Short Sale, with $30K loss to the bank, who subsequently issued a 1099C. Because this is not an owner-occupied property, the $30K will be considered ordinary income to the investor ? Ok, so, he does end up with some capital loss, but capital loss deduction is limited to $3K per tax year… ?
3) In either case above, can the 1099C amount be “converted” into basis adjustment, for capital gain/loss calculation?
2.
bronchick | December 28, 2007 at 10:20 pm
You are basically correct, it only applies to OWNER OCCUPIED loans.