Friday, December 21, 2007

Tax Relief for Mortgage Default Income

Yesterday, President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007. Under the tax code, a lender who forgives a borrower's debt must provide a form 1099 to the IRS reporting the forgiveness of indebtedness as income to the borower. The new legislation provides taxpayers who experience a home loan foreclosure or renengotiation resulting in forgiveness of indebtendness income with a three-year exclusion up to $2 million. Bush said during the signing ceremony: "The law will increase the incentive for borrowers and lenders to work together to refinance loans -- and it will allow American families to secure lower mortgage payments without facing higher taxes."

When one group of taxpayers gets tax relief, another group of taxpayers picks up the slack. The new law provides an estimated $1.153 billion in tax relief. It's paid for in part by imposition of new tax penalties for taxpayers who fail to file Sub S or partnership tax returns and an increase in corporate estimated tax payments due in 2012. The estimated revenue effects of the tax relief law are here.

If home mortgage borrowers are entitled to forgiveness for the income tax consequences of their default, who is to blame? Forgivness of indebtedness income corresponds with the forgiving lender's bad debt deduction. Why not eliminate the corresponding bad debt deduction for the lenders whose home mortgage loans produce a forgiven deficiency? Tax News reported that when the bill was before the House Ways and Means Committee in September, Rep. Kevin Brady, R-Texas, said that he wished the cost of paying for the relief was more tightly targeted to the lenders and real estate speculators who helped create the subprime lending crisis. Committee Chairman Charles B. Rangel's, D-N.Y. response explains it all for you. "It's so much easier to give the tax break than to pay for it."

No comments: