After the Pain of Foreclosure, a Big Tax Bill

[ariesgem]

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.

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.

Foreclosure is one way that beleaguered homeowners can fall into this tax trap. The other is when homeowners are forced to sell their homes for less than the value of the mortgage. If the lender forgives that difference, they are liable for income taxes on that amount.

The 1099 shortfall, as it is called, stems from an Internal Revenue Service policy that treats forgiven debt of all types as income even if the taxpayer has nothing tangible to show for it, unless the debt is canceled through bankruptcy.

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

[DaveJ]

1. The housing situation is even more screwed up than healthcare in the U.S.

I'm not saying that I feel sympathy for people who lose their homes. I've never had one, and I probably never will unless I do something spectatular in life, or the system dramatically changes. People who don't do shit somehow get homes and overall the system makes no sense. People who have families who lose their homes are such a grand focus, yet I raised step-kids in an apartment and nobody cares about that. I'm a little annoyed by the fact that people show all this sympathy for people who lose their homes, yet not as much for people who never have them in the first place.

The housing situation is screwed up in the U.S. The Earth should be available to all its inhabitants, not just some of them. Rich elitists own everything and that is not the true core of American values. People who hoard the Earth to themselves, as if they have some special right -- landlords, real estate investors, etc., are the worst scum on the planet.

[izzie]

2. I read that and it sure seems un-fair but bet the banks will not

have to pay. Looks like the govt. needs money if they are after people who have lost their home because they could not pay for it. It seems if they can use that reasoning with the home owners it would move to the bank as the new owner and I bet they do not have to pay one cent more on their tax if they pay any in the first place. It looks to me that the only person in the deal that does not make money is the poor man who lost his job and home, and some one is going to trail him to his grave. Going to take a number of years to get the every day people back on their feet after these last years with Reagan and the Bush men.

[Tesha]

3. Duplicate

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x1621523