Debt Forgiveness | Underwater Homeowners Face a Tax Time Bomb

Underwater Homeowners Face a Tax Time Bomb

I have a piece in Salon about an under-the-radar issue I’ve discussed here before. Here’s a long excerpt:

The letter from Bank of America Home Loans got right to the point. “We are pleased to inform you that we have approved your Home Equity Account for participation in a principal forgiveness program offered as a result of the Department of Justice and State Attorneys General global settlement with major mortgage servicers.” In the letter, which I obtained from an anti-foreclosure activist, Bank of America offered the homeowner full forgiveness of their entire home equity loan balance of over $177,000. But then Paragraph 5 came with an ominous warning: “Please be aware that we are required to report the amount of your cancelled principal debt to the Internal Revenue Service.”

Under current law, a principal reduction like this would be exempted from tax liability. However, that law, the Mortgage Forgiveness Debt Relief Act, expires at the end of the year, and after that, any mortgage debt forgiveness provided to a borrower will count as gross income for tax purposes, potentially costing millions of families several billion dollars. In the above case, the borrower would be required to pay taxes on the entire $177,000 amount forgiven by the bank, as if it were earned income. And that’s money that struggling homeowners simply don’t have.

“They wouldn’t be able to handle it,” said Peggy Mears of the Alliance of Californians for Community Empowerment, a community organizing group in California that has worked extensively on foreclosure issues. “If they could handle it, they wouldn’t be in arrears with their house notes. They don’t have that kind of money.”

The tax issue could significantly disrupt a still-fragile housing market and rob homeowners of the tools to pull themselves out of mortgage debt. It also represents a final indignity for homeowners who have been abused by the fraudulent mortgage practices of leading banks for years. Just when they think they get relief from their troubles, they get hit with a massive tax bill they cannot pay. “This has the effect of pulling people up with one hand, and hitting them in the face and knocking them over the cliff with the other,” said Sen. Jeff Merkley, D-Ore., who supports extending the law.

I wanted to add some more context that I wasn’t able to fit in a very long piece.

Rest here…


3 Responses to “Debt Forgiveness | Underwater Homeowners Face a Tax Time Bomb”
  1. Mortgage Fruad Examiner says:

    First, if you get the 1099 from whatever Bank, just dispute it. The burden is on the Bank to prove they lent you money. That is why they are writing it off…its cheaper to burden you. In Arkansas that is exactly what the Supreme Court ruled…Discover Card vs. Betsy Danner.

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  2. talktotennessee says:

    I am not aware of a B of A forgiveness plan. They are foreclosing on my property despite having a lawsuit against them. I am also told that if your loan is FNMA you will have no principal write down. . period! Despite the fact taxpayers bailed out FNMA and Freddie, the hard line answer is absolutely NO principal write down as Geithner and Obama wanted and tepidly admonished FNMA for their stand. I expect they put little pressure on them to really do it but want to LOOK good to all of us out here in an election year that they are doing SOMETHING when really NOTHING is being done to help.
    Years of this housing mess will haunt and have not even been realized at this point! Only the wealthy are recovering. Middle and low income have lost their homes, are underwater and there will be NO recovery because those seeking to sell or buy are stuck. More will walk away and this is what FNMA and Freddie plus the administration knows and why they refuse to write down.
    They are afraid of an avalance of “walkers” who will just leave their houses and go.
    Folks, it will happen anyway! They have no place to go when they lose ability to pay those high mortgages that are not recovering.
    People just don’t realize yet but it is investors who are creating a new bubble and it too will burst. There is no recovery. The rich will get richer (off of us) and the poor will be with us always!

  3. Sarah says:

    Does the IRS give a 30 year option to take advantage of today’s “low rates”?

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