The Law Offices of Lance Denha Explains Taxable Income Implications with Foreclosure

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The Law Offices of Lance Denha P.A. has recently reviewed the position IRS may eventually play when families lose a home to foreclosure.

Anytime a lender writes off, or “forgives,” debt, it can be considered taxable income to the borrower. The larger the write off of the loan by the lender, the larger the potential tax bill may be issued to the taxpayer/homeowner. Consider that every $10,000 in forgiven debt could incur as much as $1,500 to $3,500 in federal taxes, depending on a family’s tax bracket. If a home is $100,000 “underwater,” that could mean a federal tax bill of up to $35,000. In addition, state and local income taxes could increase the pain.

In recent years, most underwater homeowners who lost property to foreclosure or short sales were excused from having to pay taxes on this income, thanks to the Mortgage Debt Relief Act of 2007. The current law states that homeowners don’t have to include forgiven debt as income provided:

1.    The debt was secured by a principal residence. Mortgages on investment property or vacation homes don’t qualify.

2.    The debt was “used to buy, build or substantially improve a principal residence, or to refinance debt incurred for those purposes,” according to the IRS.

3.    The maximum amount that could be treated a “qualified principal residence indebtedness” is $2 million, or $1million if married and filing separately.

The act’s protections are scheduled to expire at the end of the year, however, and it’s not clear when or even if Congress will get around to renewing them. “Obama did include it in his budget, to extend it to 2014,” said Mark Luscombe, a principal analyst for tax research firm CCH, a Wolters Kluwer business. “Congress….. might decide it’s not as crucial as extending the tax breaks that already expired at the end of last year.” That doesn’t mean Congress won’t eventually act to extend the relief, Luscombe said. “Usually the only fight about these things,” he said “is finding a way to pay for it.”

Lance Denha, Esq., of the Law Offices of Lance Denha, commented recently that “The scheduled expiration of the mortgage debt relief law means a whole lot of uncertainty for a whole lot of underwater homeowners who are in the process of foreclosure.” More than 2 million people are currently in foreclosure, according to numbers maintained by Lender Processing Services. An additional 4 million mortgage holders are at least 30 days behind. If a homeowner is early in the foreclosure process, though, it may already be too late to beat the December 31st expiration of the law unless an owner arranges a deed in lieu of foreclosure, in which the homeowner hands over their keys in exchange for being released from the debt. However, rushing to hand over the deed to a lender may be a mistake if Congress ends up extending the debt relief act. In addition, lender forgiveness of debt is not automatically assured and many times a securitization audit would have uncovered errors by the lender, thus allowing for legal action and keeping the home.

It should be noted that lenders still have the right to pursue deficiency balances even if they choose to issue a 1099-C, which is the tax form used by lenders to show the taxable income issued to homeowners. Homeowners then are able to use the Mortgage Debt Forgiveness Act to exclude this income from the discharge of debt on their principal residence. However, there is no guarantee the financial institution will not later amend its tax returns and then pursue the homeowner for the deficiency balance. Should lenders choose to exercise this option; homeowners need to be cognizant of the financial responsibilities which may follow. At the very least, the consumer should consider all options and perhaps consult an attorney or accountant so that an expert can help explain the situation.

The Law Offices of Lance Denha, P.A has negotiated numerous deficiency balances with creditors and is committed to ensure that every possible avenue is pursued so that the homeowner’s legal rights are preserved. Actively monitoring the ever changing landscape of foreclosure laws, recent foreclosures across the nation as well as state imposed rules and procedures associated with foreclosure is vital to ensure and protect these rights.

The Law Office of Lance Denha P.A. is a multistate law firm and helps legally defend wrongful foreclosures against homeowners and utilize any and all legal tactics available to help accomplish preserving homeowner’s rights. For further information or assistance, please call at 954-840-0770.

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The Law Offices of Lance Denha, PA
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