Tax Headache Follows Foreclosure Hangover

September 11th, 2007

House owners are besieged. President Bush and the Federal Reserve have come forward with platitudes. But another lot of adjustable rate loans is about to be increased. Unless the Congress takes quick and fast action more trouble will come out of Pandora’s Box from April next year. The tax bogey is just waiting to catch unfortunate victims.

The tax laws have become anachronistic. They were written at a time when it was taken for granted that property sale always spelt profit. It did not take into consideration the loss factor but rather imposes a penalty clause. Houses may also be sold if the owner changes place of work etc. If the market rate is down then inevitably a forced sale leads to a loss.

In the case of stocks, investment property or residential properties the gains can be offset against capital losses. But if the employer reimburses losses then that amount is calculated to be taxable. However a rented property can be sold as an invested unit. The actual renting out must be done to escape the tax dragnet but the deduction can be made only after the date of giving it out on rent and not before.

People are unaware of the tax ogre. If the unit is sold at a price less than the mortgaged amount then the difference is taken as an income for the borrower. What is forgiven by the lender is not forgotten by the tax body.

In such a situation a negotiation between the lender and the borrower is of vital importance. The payment can be lowered or stretched without showing a foreclosure to avoid the tax pinch.

It will take time for the President’s tax waiver to become effective. Thus when planning to sell a residential property immediately take legal advice. Refinancing into a new mortgage scheme does not come under the tax glare

A new Federal Housing Administration programme is helping delinquent borrowers but to qualify certain requirements are necessary like providing correct details about on-time payments during the period of teaser rates. The interest re-set has to be from June 2005 to December 2008. Thirdly there must be 3% cash or equity. Lastly the borrower should show an unbroken record of employment and an affordable income.

The veil of the foreclosure has been brutally torn apart. That of the tax savagery is soon to be exposed.

Via