Did anyone watch the President speak this morning? I thought I heard him say he was signing a bill this afternoon that was getting rid of the “Phantom Tax”
Does anyone know about this and when it would go into affect?
I believe it means that the loss the lender incure from a loss on a note is not a taxable event for the original home owner. For example, if the home owner has a note for 100k and the lender ends up clearing 85k after foreclosing or if short saled it, then the IRS will not treat the 15k loss the bank had as an income for the home owner.
Fadi… I dont know a single person who has received a income statement from a lender and its about time the Government steps in and corrects the fear of a SS or foreclosure by the borrower.
any estimate on when this bill might take effect?
I know many LLs who use the phantom income to cause problems for tenants who skip owing money. They will forgive debt and send the tenant a 1099. The IRS goes after the tenant for failing to report income.
Here’s an excerpt from the news story:
TAX BREAK FOR MORTGAGE DEBT FORGIVENESS
President Bush signed into law today a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under preexisting law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.
This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million for refinances).
Does this mean there are no more 1099s for short-sales as of today?
Can someone explain this last part of that bill
“For purposes of calculating capital gains, any debts discharged excluded from income under the new law must be subtracted from the basis of the taxpayer’s principal residence (but not below zero). However, taxpayers may generally exclude from capital gains income up to $250,000 (or $500,000 for married couples filing jointly) for properties owned and used as their principal residence for at least two of the last five years.”
Does that mean they have to have owned the house for 2 out of the last 5 years otherwise they may still get taxed?
Mortgage Relief Debt Forgiveness Act of 2007. HR 3648 (google it)
Basically, it changes the way the IRS views the 1099-C that is being given to people after foreclosure/short sales. Instead of filing form 985, and claiming insolvency, they won’t be taxed at all. If they meet certain criteria, and of course, probably fill out a DIFFERENT form.
Steve
Just FYI, I just heard someone yesterday say that they got a stuff from the IRS saying that HSBC (Household Bank I believe) claimed the foreclosure as phantom income.
Perhaps you don’t… But trust me they go out by the thousands. Standard procedure.
The bill is now been approved by both houses of Congress and signed. I am not an accountant or an attorney but it seems that the bill applies only to primary residences as outlined in the IRS code. This status is very clearly defined.
Investors in foreclosure will still be at risk for “phantom Income”. However, someone who is really backed against the wall and has to sell their property are not too concerned with this problem. You do need to advise them about it and recommend that they speak with their accountant to assess the impact on them personally.
If the property is their primary residence is there still any risk of 1099 tax? Do they need to own it for 2 of the past 5 years?
[quote author=JohnSilva link=topic=33400.msg156976#msg156976 date=1198472504]
If the property is their primary residence is there still any risk of 1099 tax? [quote]
Not now. The forgiven debt is not taxable income for the next three years, so no 1099-C and no taxable income.
Do they need to own it for 2 of the past 5 years?
No, definitely not. Forgiven debt is now excluded from income no matter how long the property was owned.
So the loss the lender incurs is not going to be taxed by the federal government, towards the seller, correct? So what happens with the seller, does that mean the loss (deficiency) owed by the seller won’t be taxed, but will still be responsible for the remainder of the amount owed if the property is short saled on? It sounds to me that it still would not affect the investor in anyway and takes off just a tiny bit of stress off the sellers shoulders. Please clear a little bit of the confusion for me. Thanks guys.
So if the homeowner cannot be taxed on the income. Can the lender still go after them for the balance?
Mortgage:200K
Sold: 150K
Defieciency: 50K
Even if the homeowner cannot be taxed on that 50K, can the lender still come after them for it by trying to make them sign a promissary note or sueing them?
Thanks
JD
Thats exactly like my last question only worded and described way better than me. My sister-in-law says that in her experience, and she’s been in the real estate industry for over 10 years five of which as a loan consultant at Washington Mutual, has seen all the lenders go after the deficiency no matter what paperwork has been signed.
She says the mortgage is the promissory note and the homeowner is still responsible for paying back what was loaned to them. :deal. Things might work a little differently here in New York though. Too many damn taxes if you ask me.
-James K.