Homefront: Check this Mortgage Worry off You List

Dec. 27, 2007- Knight Ridder Tribune Business News
By: Jim Wasserman

For households mired in mortgage troubles, there's one less worry this year.

That's the nasty tax consequence of avoiding foreclosure by selling a home through a "short sale" or other loan rearrangements. Worry no more. A bill signed by President Buch last week lests homeowners off the hook for a little-known tax bite that occurs when mortgage debts are forgiven. The reprive applies to households that use short sales or other mortgage relief efforts during 2007, 2008 and 2009. The National Associations of Realtors is among those saluting the president's action, calling it "an issue of fairness and not kicking people when they are down." First, the definition of a short sale.

It is where the bank agrees to accept less that it's owed when a home sells. These sales, which enable banks to avaid the end costleier process of foreclosing and selling the house in a delining market, have become increasingly common this year. Under the standard short-sale scenario, if you sold your house this year for $350,000, but owed the bank $400,000, you'd have hefty tax consequences in 2008. The IRS would count that $50,000 in canceled debt as taxable income. It's what's known as "forgien debt" and typically triggers a 1099 tax form. But now, the IRS in required-for three years--to abandon its traditional tax rules on canceled debt.