Eliminate Income Tax on Foreclosed Properties

Eliminating 'Phantom Tax' on Foreclosures Gets a Boost

The House Ways and Means Committee voted to change a law that forces home owners to pay an income tax on mortgages that have been forgiven or foreclosed, a move that the NATIONAL ASSOCIATION OF REALTORS® has long supported.

The current tax code requires a lender who forgives debt to provide a Form 1099 to the IRS stating the amount the borrower has been forgiven. This disclosure applies whether a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement relieves the borrower of the obligation to pay some portion of his or her debt. If the property is sold at foreclosure or is sold for less than the amount borrowed, that difference is considered income and is subject to the tax.

“Changing the IRS code for these situations will relieve a tax burden for families who are already in financial distress and are most likely unable to pay additional taxes,” says NAR President Pat V. Combs, who supported the House committee’s action in moving the Mortgage Cancellation Tax Relief Act, H.R. 3648, forward. NAR has pursued repealing the “phantom tax” law since the early 1990s.

Action on this legislation comes at a good time, too — when many families are being affected by the resetting of interest rates on subprime mortgages and the ongoing rise in foreclosures.

H.R. 3648 would ensure that any mortgage debt secured by a principal residence will not be taxed. “The relief proposal addresses a fundamental unfairness that affects the lives of those who find themselves in truly unfortunate circumstances,” Combs says. “We must all work together to prevent the dream of homeownership from becoming a nightmare.”

The legislation includes a provision to safeguard against abuses. The provision, similar to one that already exists for commercial real estate owners, would treat commercial and residential property equally. NAR also supports the proposed offset, which tightens the requirements for taking advantage of some tax benefits while retaining all of them.

Source: Realtor® Magazine 9/27/07