Help for Victims of Foreclosure – The Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648)

Help for Victims of Foreclosure – The Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648)




The “Sub chief Mortgage Crisis” has claimed many victims. Subprime adjustable-rate mortgages represented just 7% of all loans, but made up 43% of loans entering the foreclosure course of action in the third quarter. High powered investors who bought into Structured Investment Vehicles (SIVs) that were backed by high interest mortgage loans could be forced to take it on the chin. However, the big edges and brokers are bailing out these SIVs and in turn, the edges and brokers are being bailed out by loans from the Federal save and foreign investors. The United Arab Emirates and Singapore have helped out American money center edges & Merrill Lynch etc. with billions in fresh cash. But the real victim of this crisis is the little man. He is not likely to get a bailout. Congress has at the minimum given him some tax relief.

Currently over 995,000 homes are in foreclosure according to the Mortgage bankers Association. The year 2007 could be a record one for homeowners in distress. In the past, not only would your credit rating be ruined from foreclosure, but you might also get a tax bill from Uncle Sam in addition. The tax code considered forgiven debt from a foreclosure as taxable income. Many times, the lender would report a loss on the foreclosure and issue a 1099C for debt cancellation. Folks who failed to properly address the foreclosure on their returns got an “Under-reporter” letter from IRS. Large tax debts could consequence from the forgiven debt. Thankfully, Congress has come to the aid of beleaguered homeowners with “The Mortgage Forgiveness Debt Relief Act of 2007.”

H.R. 3648 provides for a 3 year suspension of traditional tax treatment on forgiven debt from a foreclosure (1/1/07 by 12/31/09). It is estimated that this law will save foreclosure victims up to $600 million in tax over the life of the law. It is retroactive to the start of 07 but not for prior years. The law applies not only to foreclosure, but to loan renegotiation and workout plans that may include some uncompletely reduction of debt.

Up to $2 million of forgiven indebtedness on a qualified home are eligible for exclusion under the new law. However, it is only for debt related to the acquisition, construction, or substantial improvement of a qualified residence. Homeowners who “cashed out” their equity to pay other bills or for non-home related items and are now facing foreclosure do not qualify for the exclusion. They will nevertheless confront a possible tax bill unless qualified under the provisions of IRS Code Sec 108 for insolvency or bankruptcy.

If you have lost a home to foreclosure, do not have your tax return done by the barber who also does taxes during filing season on the side. Also, avoid the chain store tax shops. See a CPA or Enrolled Agent (E.A.) to have your taxes done by a licensed specialized. The additional cost will likely save you money in the long run.




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