Can anyone explain?
So if a homeowner falls into the criteria, the IRS cannot tax them on in deficency, but can the lender still come after them for that amount?
I am confused about this and would love if someone could explain in Lamen terms…
Say I loaned you $1000 that you agreed to repay in 90 days. At the end of the 90 days, you are unable to repay for whatever reason. You don’t have anything of value to offer me in exchange for the $1000 I loaned you, and I don’t think you will be able to repay me any time soon and taking you to court to get a judgement seems more costly than the result I might achieve.
So, we agree to just forget the debt. I have just cancelled the debt and forgiven the loan. Since I gave you the $1000 and now have no expectation of repayment, the IRS says that you received $1000 in income and wants to tax you accordingly.
Apply this analogy to the homeowner who got a loan to purchase a house. For whatever reason the homeowner can no longer afford to make the loan payments and can’t sell the house for what he owes. The lender agrees to accept less than what was owed and forgives the rest of the debt.
The IRS says that this homeowner received money that he is not required to repay, so therefore that money he received is taxable as income. The problem here is that the homeowner had to sell the house for less than he owed on his loan, and therefore has no cash from the sale of the property. He has “phantom income” as a result since there is no money in his pocket, but yet he is being taxed as if there were.
For certain homeowners with phantom income whose circumstances suggest that paying the taxes on that income will be a true financial hardship, the Mortgage Tax Relief Act excludes that income from taxes.
eggsellent eggsplanation, Dave.
Hope you had a Merry one and a Happy one.
So because the Mortgage Company forgave the debt, they cannot come after the homeowner and the irs cannot tax them, correct?
*only if they fall under that circumstances that are outlined in the law
if the mortgage co has forgiven the debt, then they are through with the debtor. They cannot collect forgiven debt. They cannot sell it, transfer it; it is no longer “debt.” It has been forgiven. Just the same, I’d be sure to get it in writing.
Conversely, if they’re still collecting, it hasn’t been forgiven.
forgiven debt is always income, so then the IRS comes after the debtor unless you fall within the parameters of the MTRA to have the forgiven debt excluded.
Thanks for clearing it up Mark, I appreciate it.