Can You Explain The New Law That Reduces The Taxes On People In Foreclosure?

President Bush signed into law this week a “tax cut” for people in foreclosure.  Under the prior law, if your house was foreclosed and sold for less than the mortgage balance, you would have to declare that amount as income!  Yes, I know it is hard to imagine, but this was the law.  The concept is based on the principle that the mortgage companies loss had to be declared as a gain by the person to whom the loss was attributed.

For example, if you owed $200,000 on your mortgage and ended up in foreclosure and the auction of your home only brought $150,000 you would have had to declare an additional $50,000 of income on this year’s tax return.  To be sure borrowers actually got stuck with this tax, you would receive a 1099 from your mortgage company which was also sent to the IRS computers for tracking.  Depending on your tax bracket, that could end up costing you well more than $15,000 in additional income taxes.  Nothing like kicking a guy when he is down!

Under the new law just signed by the president, the loss incurred by mortgage companies is not taxable to the defaulted borrowers.  This was a tremendous and positive change and I sincerely applaud it.

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