Tax on Foreclosure Savings Waived

January 7th, 2008

Christmas was not without cheer last year. As the holiday season ends many will be relieved to know that they will not be burdened with tax bills for getting a part of their loan forgiven. Congress recently approved a tax-relief bill to help many. When there is a short sale the amount is often less than the loan amount. But the lender agrees to forgive the due balance. Unfortunately till recently the tax authorities considered this savings to be taxable income. Thus in the past many were added insult to injury by being saddled with huge tax bills. The legislation will help all for all those concerned from 1^st January 2007.

Many were taken by surprise as none realized that the government could be so heartless as to fleece those who had just survived the foreclosure crisis. But today the picture is different. Those who have had a portion of their debts forgiven need not fear the taxman’s knock. The law however is of a temporary nature and will expire in 2009. This exposes the line of thinking of the lawmakers. They are under the strong impression that the sub-prime crisis is for a short period and will blow over.

The bill also extends a tax cut for private mortgage insurance till the end of 2010. Those who paid less then 20% towards down payment have to contribute to mortgage insurance. The insurance aims to protect lenders from defaulting borrowers. The cost is half of 1% of the house mortgage – for instance $75 will be charged for a loan of $180,000. Full deduction is for only those house owners who have an adjusted gross income of $100,000 or less. Last year the percentage of those availing of private mortgage insurance rose – this being indicative of tight credit postures being taken by lenders. During the first three quarters of 2007 private mortgage insurance increased by 40% in comparison to the same period during 2006. Previously house owners just could not afford the 20% down payment and this made them go take a piggy-back mortgage. In the latter instance the borrower gets a first mortgage for 80% the value of the property, a second mortgage for 10% and pays 10% up front. But second mortgages are now practically impossible to avail of. The deduction for private mortgage insurance is restricted to those issued after 31^st December 2006.