Tax on Foreclosure
The impact of the housing market and the tighter lending standards has put the homeowners into a dilemma. Lending crisis continues to shake out, it has affected homeowners particularly those who have used creative mortgages. Long-time homeowners who refinanced their properties based on increased value too could find themselves in tax trouble with foreclosures.
The increasing foreclosure rate in the country resulted from the collapse of the subprime loan market. These Subprime loans were sold forcefully to gullible borrowers. Today the real value has suffered and equity has taken a record beating. According to the recent data it exhibited that neighborhoods with home prices less than $250,000 are taking the worse beating, on the other hand, higher-prized communities remain relatively unscathed.
As debt cancelled by lenders is considered taxable income, taxpayers who lose their homes might be left with a higher than expected tax liability. It is reported that there might be some legislative relief from D.C.
President George W. Bush announced his support for a proposed amendment to provide relief from discharge of indebtedness income for taxpayers who lose their primary residences to foreclosure.
The President calls on congress to change a key housing provision of the Federal Tax Code so it does not punish families who are forced to sell their homes for less than their mortgage is worth. The current tax law counts cancelled mortgage debt on primary residences as taxable income. The President also proposes temporary relief to ensure that cancelled mortgage debt on a primary residence is not counted as income.
Bush's proposals would make it easier for adjustable rate mortgage holders to refinance using the recourses of the Federal Housing Administration, a Depression-era agency created to help low and moderate income Americans to afford homes.
An estimated 60,000 homeowners are behind payments because their mortgages have reset. They can refinance with FHA-insured loans, as they do not insure refinanced loans from borrowers who are currently delinquent.
As part of the mortgage package, Bush said he would support legislation currently pending in Congress. This could temporarily change tax law to let homeowners avoid paying taxes on forgiven debts in loans restructured by financial institutions. He also urged the Congress to modernize and improve FHA so more homeowners could qualify for mortgage insurance. This programme will only benefit those with good credit who have lagged behind refinance for a Federal Housing Authority (FHA) secured loan.
This relief is proposed only to give homeowners a time-out from foreclosures. The scheme does not guarantee recovery to all consumers and community organizations that have been urging for a six-month foreclosure freeze. This scheme focuses more on rescue loans and the release of more funds for credit counseling agencies. The freeze will only provide suffering homeowners time to get their bearings.
The government tries every way it can to control the rise in foreclosure rate. Bush's proposal is to help delinquent borrowers avid foreclosures.