Debt Forgiveness Act - What Does it Mean to You?

Does it Matter?????

Everywhere I look today on Facebook, emails and texts, there are myriad agents and government entities shouting with glee over the one year extension of the Debt Forgiveness Act.  I agree this is a good thing, however, more for mindset and lessening the fear factor than for actual help.

Keep in mind that the law, passed in 2008 as Bush was leaving office, protects a homeowner who either allows a home to go to foreclosure or closes on a short sale with debt- forgiveness  from being taxed on the loss (to the lender), which is considered a gain like ordinary income to the homeowner. In either case the homeowner will likely receive a 1099c stating they have a gain in income…just as if the homeowner were self-employed and received a 1099 declaring how much income they had made that year.  Even if they do not receive a 1099c they are obliged to declare the income anyway to the IRS.

The bill states that there can be NO taxation IF (and this is a huge IF): 1) The home is their personal primary residence under IRS code (owner-occupied 2 of the last 5 years), and 2) The loan on which the debt was forgiven is PURCHASE MONEY (meaning the original loan taken out when the property was first purchased by said owner) period. 

Do You Know How Few People this Law Actually Protects?...

In California, less than 20%. If you refinanced your original loan to send your kid to college, to buy another home, to throw to the winds of the sea…this law does not protect you…never did. And , no, if you just refied to get a lower interest rate and took no cash out it is still questionable as to whether this act actually kicks in even for you.

Do you know the other ways to protect yourself against taxation after a foreclosure or short sale or loan mod with a principle reduction? There are several and one of them is available to almost anyone who finds themselves in this situation of losing or short selling a home.

Listen to my radio show this Saturday, 10 am, 1360 AM KFIV to get the answers.  IHeart radio, too. HOUSE CALLS with Christine Papworth, the Real Estate Dr.  Anyone out there disagree with me? Let’s talk.