Feb 19, 2008

Foreclosure- Debt Forgiveness- will it cause more foreclosures?

Normally, a foreclosure of your primary residence can have some serious tax effects. Depending on your financial details, the debt forgiven on foreclosure of your primary residence can be fully or partially included in your taxable income. However, recent tax law changes have opened a temporary loophole to the taxation of debt forgiveness on a foreclosure on your primary residence.

However, in order to benefit from the recent legislative changes to the taxability of debt forgiveness on your primary residence, a taxpayer will need to foreclose on their primary residence and have the debt forgiven in 2007, 2008 or 2009.

One wonders if this will cause more foreclosures?? The tax benefits and loophole created by Congress and signed by the President leaves a limited time to capture these benefits. If I was contemplating foreclosure, this tax relief may push me over the edge to go into foreclosure.

This is another example of a tax law change that may not have been well thought out before it passed. Time will only tell.

If you have tax debt associated with a home forclosure or any type of debt forgiveness, consider contacting a tax professional for advice on how to proceed.

1 responses:

Pete Johnson,  February 27, 2008 at 6:32 PM  

Another problem with foreclosure debt forgiveness that I have seen involves creditors trying to collect previously forgiven debts. It seems to me that once a debt is forgiven for tax purposes, that is admission that the debt no longer exists and should not be collectible. When creditors collect forgiven debts, aren't they required to provide the debtors with amended 1099's?

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