Taxable forgiven Debts and Foreclosures

Posted on January 9th, 2008 by saman

After the bubble burst of the US mortgage market there have been a number of steps taken by the current government to provide relief for the families that had gone through the turmoil of losing their property, their possessions and above all their pride in the system that was never supposed to fail them. In the last few months before the congress adjourned for 2007, it proposed and approved a bill for the families that had suffered through this turmoil and had a portion of their mortgage debts forgiven.

In order to understand the term ‘taxable forgiven debts’ we have to understand the whole dilemma behind the scenes. The forgiven debts is the amount that is left after a short sale of a property, this means that your debt to the lender accounts more than the actual value of the property at the time of sale. This leads us to the ‘forgiven debts’ part of the story. The part of the story that most of the general population does not understand is that these type of ‘forgiven debts’ are ordinarily declared as taxable. In short this means that now the borrower who had to lose his home because he or she couldn’t keep up with the repayments will now also have to come up extra cash to pay off the ‘taxable forgiven debts’. There are few that describe this as a double whammy or a better word for this would be something like surprise whammy as most of the borrowers do not even knows about this provision in their contracts. On the other hand families who only lost their homes in the process have something to cheer about as they do not have to come up with these staggering taxes because in most of the cases these mortgage debt were cancelled, thus sparing these borrowers from the taxes.

The people that see this as an opportunity were warned by the experts that this shouldn’t be seen as a way out because this bill will be rendered invalid in 2009 and only accommodates the forgiven debts that occurred after 1st Jan, 2007. So this is being seen as a temporary solution to a temporary problem. The experts however disagree to this proposal and say that this should be made a permanent bill in the mortgage market rather than a temporary solution, and there are still those who argue that this tax should never have been introduced in the first place and that these kind of temporary measures are pushing the market back into recession. The people on the other side of the fence argue the reasons behind the crash of the mortgage market have not been identified in the first place and temporary solutions will bring new loop holes into the already perforated system.

Most of the people who have to come up with mortgage insurance are those that put 20% or less on their home loans and the number of homeowners with private mortgage insurances has increased sharply in the last four months.