Homeowners facing the distress of a “short sale” got some good news last week. The House approved new legislation that would provide relief from the controversial practice of imposing tax on borrowers whose lenders forgive a portion of their debt. The IRS would normally demand income tax on the full amount of debt relief. For example, if a short sale designed to avoid a foreclosure produces $50,000 less than the balance owed to the lender, the IRS currently requires the lender to report the $50,000 debt forgiveness on a Form 1099-C. The IRS then treats the $50,000 as ordinary, taxable income.

The house passed bill (HR 3648) would prohibit income tax levies on forgiven mortgage debt. Similar legislation is pending in the Senate (S 1394). The bill is retroactive to Jan 1, 2007. It would not include transactions that took place in 2006. The question still remains as to how to cover the lost tax revenues.

Steve Siegel, Coldwell Banker
Email: steve.siegel@cbnorcal.com
mobile: 916.212.5066
www.teamstevehomes.com
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