The Mortgage Forgiveness Bill Of 2007: Will It Raise Or Lower Your Taxes?
One of the most controversial and paradoxical real estate and mortgage finance stories to hit the media in recent weeks was that of a newly crafted real estate tax bill the socalled Mortgage Forgiveness Bill of 2007. The bill which may help you hold onto your money if you face foreclosure but will likely hit you hard in the wallet if you own a second home was drafted by Democrats and approved by the powerful House Ways and Means Committee.
Rising Foreclosures Led to the Drafting of the Bill
During the past two years a number of economic factors have conspired to create a perfect storm of problems for many homeowners. First of all prices of residential real estate fell precipitously. Then as interest rates rose the monthly payments for many adjustable rate mortgages jumped. Next the mortgage industry hemorrhaged thanks to the volume of bad loans and delinquencies and this trouble spilled over into other areas of the financial industry. In an attempt to control losses and appease government regulators and investigators mortgage lenders tightened their guidelines for approving loans after a long period of lax standards and easy money.
Just as homeowners realized the imminent danger of rising adjustable rates and rushed to refinance into more affordable conventional fixedrate loans the ability to refinance got harder as loan applications became much more stringent. As the challenges for homeowners increased so did the number of foreclosures.
Lenders May Show Leniency but the IRS Does Not
Sometimes banks and mortgage companies will forgive a portion of the debt owned to them in order to process delinquent loans in the most cost effective manner. Lenders typically lose about 50 percent of their investment when a property goes to foreclosure. So forgiving debt can actually save them money in the long run by encouraging thirdparty investors to step in and buy the house before it goes to foreclosure and fetches less money on the auction block. And many government officials including the President have asked that lenders show flexibility to homeowners faced with foreclosure so there is an added incentive for banks and mortgage companies to work out arrangements that are mutually beneficial for lenders and borrowers.
Most homeowners who have part of their debt forgiven are relieved. But many are shocked to find out that under current tax law the forgiven debt is taxed as ordinary income. In other words if your lender forgives 20000 of your mortgage debt the IRS will immediately tax that 20000 as extra income. Those taxpayers recovering from mortgage problems are already in financial crisis so paying a hefty tax can easily make a bad situation even worse.
The New Bill Would Cut Out the Tax but Repay it by Curbing a Tax Break
If the Mortgage Forgiveness Bill of 2007 passes and becomes law homeowners facing foreclosure wont be responsible for paying taxes on debt forgiven by lenders. That is the main focus of the bill and is great news for those homeowners.
But in order to make up for tax revenues that will be lost if the bill goes through a major tax break for those who own second homes will be drastically trimmed.
Under current tax law a married couple is entitled to a tax break of up to 500000 worth of profit on the sale of a second home as long as they have lived in it for at least two consecutive years within the five year period before they sell. Single people can claim a tax exclusion worth half as much or a maximum of 250000. Of course gay couples still face tax discrimination in the USA because it is illegal for them to marry so gay and lesbian couples who buy a second home together are only eligible for the 250000 tax break offered to singles.
One clever way to take advantage of the current law is to buy a second home for instance a vacation property and live it for two years. Then you sell and take your profits and your tax break before moving back into your first home. But under the proposed new legislation the tax exclusion would instead be based upon how many years you live in the second home. The longer you live there the bigger your tax perks. For the most part the big tax break offered to those who sell their second homes would be severely curtailed and numerous opponents of the provision say it undermines a tax incentive that promotes investment that helps the economy.
But ironically the bill has the support of many of Americas largest real estate industry organizations including the National Association of Realtors the Mortgage Brokers Association and the National Association of Home Builders. One reason they support it is that while it does slim down the tax exclusion it nevertheless preserves it instead of totally eliminating it.
When buying selling or financing property get expert help from professionals committed to the global GLBT community at www.GayRealEstate.com. and www.GayMortgageLoans.com. Or call toll free 1888420MOVE 6683.
About the writer:nbsp;nbsp;Commitment passion and dedication to changing what you perceive as a social injustice and prejudice was the drive that encouraged Jeff Hammerberg to create a monumental service to the American LGBT community one that he had envisaged for a quarter of a century. 2004 was a significant year in realizing his dream as Jeff Hammerberg founder of the largest LGBT real estate marketplace in the world reaped the rewards of his vision that had been nurtured for 25 years.
During the 1990s he worked in residential real estate and observed first hand the “quiet homophobia” that pervaded the industry and silently but effectively hampered the lives of LGBT consumers nationwide by placing barriers between them and home ownership. By 1997 with little more than foresight a strategy and zealous fortitude Hammerberg broke away from the traditional real estate community to create the first virtual real estate marketplace for LGBT clients.
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