Thursday, December 20, 2007 President Bush signed a measure to provide financial relief for financially strapped homeowners facing foreclosure or in bankruptcy. The bill gives a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or renegotiating a loan. No taxes would be owed on the value of any debt forgiven or written off. Currently such debt forgiveness is taxable income.
Previously the amount between the amount financed and the amount recovered at a foreclosure sale would result in income and a 1099-C would be generated. Taxes would then be owed on the amount written off or the amount reduced by the negotiation.
If a home with a $100,000 mortgage balance was foreclosed and sold at auction for $85,000, then the difference of $15,000 would be reported as income to the Internal Revenue Service on a 1099-C. The original borrower would then be faced with the loss of their home and the tax burden of paying income tax on $15,000. The same would true if the original loan forgiven through negotiation resulting in a lower amount owed or if the owner was approved for a short sale.
The measurement anticipates reducing the tax burden of overextended homeowners. Limiting the tax break on sales of second homes would offset the shortfall to the government.