Did Congress recently pass tax relief on phantom income homeowners get when they sell their house at a loss?

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Marlin B asked:


If a homeowner sells at a loss because the market has dropped, but his ARM has kicked in and his payments have gotten too high for him to pay, the “write-off” of part of his loan is counted by the IRS as income. This phantom income is taxable. I thought I heard that Congress passed a bill which stops this taxation. True?

Daniel
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    • This entry was posted on Thursday, December 9th, 2010 at 2:02 am and is filed under Reference & Education. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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    No Responses to “Did Congress recently pass tax relief on phantom income homeowners get when they sell their house at a loss?”

    1. mahal Says:
      December 12th, 2010 at 3:58 am

      Yes, in fact, VERY recently.

      The House Ways and Means Committee just voted to remove a tax on forgiven debt as a result of selling a home at a loss. Apparently there are a lot of people who are being forclosed on or forced to sell their homes in “short sales” to avoid forclosure. If the sale is not enough to cover the loan, there is something left for the home owner to pay, and banks sometimes forgive this amount and cancels it.

      Forgiven debts are normally treated as taxable income when the taxpayer is not in bankruptcy or insolvent. The House has now relaxed this rule so that home owners who are distressed won’t be caught in a painful position of paying taxes on income they never saw while suffering the loss of their home.

      I didn’t see the effective date or if the decision will be backdated.

    2. Wayne Z Says:
      December 13th, 2010 at 2:35 pm

      This is not a law yet.

      Congress is moving very slowly on this one for some reason.

      There have been numerous proposals but not of them have enough support to become law.

      There is already a legal way for you not to get tax on this income. If you are “insolvent” (your debts exceed your assets) at the time of the debt forgiveness, you do not have to claim the foregiveness as income up to the amount of insolvency.

      Do not try this on your own though. See a professional who has knowledge of Form 982.