After Foreclosure, a Big Tax Bill From the I.R.S

http://www.nytimes.com/2007/08/20/business/20taxes.html?em&ex=1187755200&en=f7a1269ba284eef5&ei=5087%0A

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.”

have made sure of that!

Forgiveness of debt is generally counted as gross income- and there are actually very good reasons for it.

If he'd filed for bankruptcy of course, that would have been another matter.

No news here -- same old taxcode

I understand the benefit of the credit card forgivness, but as I understand it, there was no benefit in the case described. The debt was forgiven, but the house was lost as well. Where is the tax liability?

she later recieved a letter from the IRS stating that she had to pay taxes on a $12,000.00 credit union loan that had been reported to the IRS as income. All I had to do was call the IRS and explain to them this was a bankruptcy and the woman had let the car go. They told me that "it is all we need to know" and they they would make the correction. I have prepared this lady's taxes several years since and haven't ever heard another word from them. Was this something that was changed along with the bankruptcy laws?

Which would be subject to 18 or 15% tax (depending on how long he owned the house), not the 34/35% they are charging him.

If they claim otherwise, then they better go after all the options traders who lose the money they borrow to make bad investments with an income % instead of a capital gain %.

foreclosures are happening to people buying huge houses with huge mortgages.....guess not! She just doesn't understand. She's almost 91 so what can I do? It hurts me to hear her talk like that; acts as though people bring on their hardships. Don't people realize that even the average guy wants a home of his own and that the homes can't be bought for fourteen thousand dollars anymore? Too bad salaries didn't keep up with housing prices.

in this case.

As an example...if you run up a credit card balance of $20,000, and you reduced it to $15,000 but now can't pay and you work out a deal with the CC company to accept $5,000 as paid in full, the IRS says you benefitted by getting $5,000 of good or services free. I understand that.

In this case, Mr. Short receive NO Benefit that I can see! He had a debt, he didn't pay it, but he also lost the house, so what can he possibly owe tax on? I believe if this were challenged, the IRS would lose.

And I am in contact with an attorney to argue that if the security in that debt is a house and that home goes on the auction block, then the only amount of money the debtor should recognize is the difference between the Fair Market Value of the home at the time of the foreclosure and the funds that are raised at the auction...

It's obscene, the way people are treated over their debts, especially compared to the way corporations are allowed to negotiate and walk away from theirs. Saw it all the time in banking. The little guys got the shit hammered out of them. If you were wealthy, you remianed wealthy. The banker wasn't going to get the lady of the house to give up her fur coat and country club membership and the kids weren't going to give up their private schools.