What you need to know about Foreclosure
Cancellation of Indebtedness - Issue Summary
What is the fundamental issue?
In today's market, some individuals are "upside down" on their mortgages (i.e., they owe more on the mortgage than the fair market value of the property). If they should sell the property and be unable to repay the full amount of any outstanding mortgage debt, the lender may forgive some or the entire shortfall. (This is known as a "short sale.") Similarly, in foreclosures a borrower might be forgiven some portion of a mortgage debt if the lender is not able to satisfy the mortgage liability from the sale proceeds. When some portion of a debt is forgiven, income tax is imposed on any amount that a lender forgives
I'm a Realtor®. What does this mean to my business?
Relief from the cancellation of indebtedness rules would greatly facilitate the sale of homes in areas where home prices have declined or where foreclosures have occurred. In addition, providing tax relief would correct the current unfair circumstance in which the only individuals who pay tax on the sale of a residence are fortunate sellers who have gains of more than $250,000/$500,000, and unfortunate sellers who have seen the value of their property decline.
National Association of REALTORS Policy:
NAR supports that there be no taxable event when a lender forgives some portion of a debt in a short sale, foreclosure or similar disposition. Such relief would be limited to principal residences.
Legislative/Regulatory Status/Outlook:
This common-sense legislation passed the House and Senate in various bills in earlier congresses, but has not been enacted. NAR will push to have the relief provision (H.R. 1876) included in any tax bill that moves in 2007