We talked before about how if you sell your home for less than you own then you could be liable for taxes if the lender forgives a portion of your debt.
Not a happy situation to be in when you just sold your home and made nothing on the deal.
Congress is currently considering legislation, H.R. 1876, that would provide relief from taxes on this phantom income in most cases.
George and Betty buy a home for $200,000 then eventually sell it for $20,000 less than what they owe on the mortgage. Right now the IRS says they owe taxes on $20,000 in forgiven debt. If the legislation gets passed and becomes law then that $20,000 would not have any taxes due on it.
But...
Say George and Betty buy that home for $200,000 with 100% financing. When they had the purchase appraisal done, which they are entitled by law to receive a copy, the appraiser said it was then worth $210,000. Wow, what a deal. They're buying a $210,000 home for only $200,000.
George and Betty are so happy with the 'deal' of a home they bought that they decide to celebrate by taking a vacation. They don't have any money so they take a home equity loan out for $10,000 right after they buy the home. (Yes, it is possible to do that).
Now they owe $200,000 and a $10,000 equity loan. And they need to sell.
Same offer of $180,000 but now they need to have $30,000 in debt forgiven.
Well now they have a problem even if the new law is passed. Debt forgiveness is only ignored by the IRS up to the purchase price of the home. So that equity loan is now taxed as income if it is forgiven.
Nothing is law yet, but it is being considered. If you're in any type of situation that needs a short sale make sure you know what you're getting into and what the current law is.
