People Who Lose Their Homes May End Up Owing IRS Tens Of Thousands

[babylonsister]

http://www.nytimes.com/2007/08/20/business/20taxes.html?ex=1345262400&en=c924620782ab01f5&ei=5090&partner=rssuserland&emc=rss

After Foreclosure, a Big Tax Bill From the I.R.S.


By GERALDINE FABRIKANT
Published: August 20, 2007

Two years ago, William Stout lost his home in Allentown, Pa., to foreclosure when he could no longer make the payments on his $106,000 mortgage. Wells Fargo offered the two-bedroom house for sale on the courthouse steps. No bidders came forward. So Wells Fargo bought it for $1, county records show.

Agnes Mouser, a 65-year-old widow in Texas, received a $10,000 tax bill after foreclosure on her loan to pay off credit-card debt.

Despite the setback, Mr. Stout was relieved that his debt was wiped clean and he could make a new start. He married and moved in with his wife, Denise.

But on July 9, they received a bill from the Internal Revenue Service for $34,603 in back taxes. The letter explained that the debt canceled by Wells Fargo upon foreclosure was subject to income taxes, as well as penalties and late fees. The couple had a month to challenge the charges.

For those who struggle to pay their bills, who watch their housing payments rise out of reach with their adjustable-rate mortgages, who lose a job or who fall victim to illness, losing one’s home can feel like hitting bottom. But one more financial indignity may await as the fallout from the great housing boom ripples across the United States.

“Getting that tax bill,” Mrs. Stout recalled, “my first thought was that I needed to see my family doctor to help me with my stress, because we had a big mortgage and other debt and then here came the I.R.S. saying we owe this.”

Notices of unpaid taxes, unanticipated and little understood, will probably multiply as more people fall behind on their mortgages, said Ellen Harnick, senior policy counsel at the Center for Responsible Lending, a nonpartisan research and policy center in Durham, N.C.

more...

http://www.nytimes.com/2007/08/20/business/20taxes.html?ex=1345262400&en=c924620782ab01f5&ei=5090&partner=rssuserland&emc=rss

[EV_Ares]

1. Just so U know, this is a Dupe: However, I hope you leave it

up for those who missed it. I think it is important in the fact of what these people are going through. To me it is like torture and all of a sudden they worry about the hedge funds and bail them out. They cry about welfare and then give welfare to corporations and the hedge funds but no workaround programs in extreme cases such as this.

Thanks for posting.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=1621523&mesg_id=1621523

[drm604]

2. Doesn't the loss of the house offset the gain?

I'm not a CPA or anything but it seems, at least ethically, like it should. It's not like these people came into some kind of windfall.

[EV_Ares]

3. You would think so and I think when you read on you will see where

the lender is or has taken another look and they are going to change their filing. Probably only because it became published in the news.

[drm604]

4. If that doesn't work

then Congress needs to look at amending the tax laws to take this into account. I can't see where anybody would be against fixing this.

[EV_Ares]

6. Absolutely, how in the hell do you justify or find a way for someone

who has just lost their home and send them a tax bill. Also, if they have lost their home, how do you figure they can pay a huge tax bill on top of all their other misery.

[ProfessorGAC]

16. I Don't Think So

It depends on how much of that house they owned, v. Wells-Fargo. If they only had, say $20k in equity, then they only lost that $20k. The forgiveness of the other $86k in debt would be what's left.

That's probably what the IRS is saying is the taxable portion.

I'm not defending them. Just positing an accounting reason.
The Professor

[SoCalDem]

5. This was a part of the bankruptcy bill, if i recall.

Technically, the wiping clean of debt, is the same as INCOME to the IRS when this bill changed the rules..

Owe Visa 5K?..go bankrupt? you just EARNED $5k/..
Visa WILL write this off as a loss, so of course the person who owed it will need to at least pony up the taxes on that "loss"..:grr:

It's ENRON economics, folks.. debt is income :eyes:

[EV_Ares]

7. I figured that was the case. Just the same, what are they going to do

with all of these people that have filed for bankruptcy; then get charged for earned income, hit with a tax bill. Hell, they can't pay so are they going to start up debtors prisons? There is so much for this dem congress to make right, they really need to get some balls and get some things done for the average consumer or the poor consumer instead of hedge fund bailouts for the rich.

[SoCalDem]

8. Oh, I think the IRS will be HAPPY

to work out a conveninet payment plan.. You just transferred your obligation from Visa to IRS :grr:

[Warpy]

9. I think they can fight it

Those forgiven debts generally cover goods or services still retained by the debtor. That's the only way they can be considered income.

People with foreclosure retain neither debt amount nor the property that secured it. They have lost equity, meaning they've taken a net loss, not gained income.

The take they're proposing means that any of us who have challenged a hospital bill and gotten the amount reduced, even if the error was the hospitals, have gained "income."

Obviously, this is nuts.

[JohnyCanuck]

10. Now you gotta sympathize with Uncle Sam too.

He has this the terrific cost of the Iraq war to bear, levees in New Orleans to fix, the cost of running the worlds largest military machine that spends more than the military spending of the rest of the world combined, and of course billions of dollars in aid to designated US allies in the Middle East. How do you think he can afford to be such a generous benefactor to all these causes if he doesn't ring every last dime out of Joe and Jane Blow taxpayer he possibly can.

[Mutineer]

11. That's how the system works.

That's the way it is. It's why once you go under, it's damn near impossible to fight your way out of the hole again.

[flvegan]

12. This is bullshit. The lender didn't "forgive" the balance.

The $1 bid on the courthouse steps is the standard opening lender bid. The bid is only raised when folks bid against them up to the amount of the Final Summary Judgment (in most states). The lender loaned $106k and in return received title to property of like value after the sale at the court.

[Blackhatjack]

13. The only way you end up with a tax liability that I am aware of is...

IF a lender initiates foreclosure proceedings and one of two things happens.

IF the property is sold for more than the amount of the mortgage balance, then there can be a gain reportable to the IRS which would trigger tax liability.

OR if the homeowner decides to 'deed the property' to the lender in exchange for cancellation of the debt and the amount of the debt exceeds the recognized fair market value of the property. In that case, the 'excess debt' cancellation could be characterized as forgiveness of a debt obligation which 'could' be considered a gain subject to taxation by the IRS.

I am no tax expert, but this story sounds inaccurate.

I have been to many foreclosure sales in which the lender bids the amount of the debt obligation they are holding, and no one else placed a bid. Lenders do not get to bid $1 in our state and take the property.

[Coyote_Bandit]

14. I know a fundie repuke schmuck

here in (J)Oklahoma whose McMansion was foreclosed. He was never forced out of the home and was able to refinance at better terms. Schmuck is very well off financially. He is investing as much money as he possibly can in luxury housing in Mexico intended for use by American tourists. Schmuck also happens to have a long history of not paying other obligations - including taxes and withholding on his employees earnings. I believe his mortgage default was calculated and intentional. It was clearly to his benefit and, in my opinion, the transaction should be taxable.

[MazeRat7]

15. This happened to me during the real estate bust in the late 80's

We were a 2 income family, just starting our careers, and had just bought our first home some 5 years earlier. My wife at the time became very ill and eventually was recognized as disabled by the SSA. In the process we had to find another place to live since we could no longer afford the house payments. After working with the PMI company and the mortgage company, both agreed not to foreclose if we could find a buyer. We did at current market rates which was 1/2 the original home price (just over 45k).

Well, to make a long story short, we got a letter from the IRS stating we owed taxes on the other 1/2 (or 45k). Their "reasoning" (if you care to call it that) was that we borrowed 90k to finance the home, paid back 45k (from selling the home), so we must have "made" 45k in the process and owed taxes.

It cost us another 5k in attorney and CPA fees to fight the issue and for a long time I was working 2 jobs just to keep a roof over our head and stay out of chapter 11. It was hard as hell and I was a "professional" with some resources at my disposal. Any one of lesser means would have been fucked. I sure thought we were.

MZr7