The House Ways and Means Committee has voted to permanently remove the income tax consequences for homeowners whose debt is partially forgiven by a lender after a foreclosure. The bill is likely to pass the House and Senate, and President Bush has already spoken publicly about his approval of the measure.
Great. Now homeowners have yet another incentive to spend beyond their means – as if interest only and subprime mortgages aren’t enough.
Don’t get me wrong. I don’t love the idea of adding insult to injury. And I don’t think adding an income tax consequence to someone already saddled with debt is a terribly effective way to get out of debt. And I realize how easy it is to become saddled with debt (I say this as a homeowner with tons of student debt, trying to educate and feed three children).
But this is the thing. I have people calling my office every week to tell me their stories. And a lot of times, it’s a combination of bad choices, bad luck and bad timing. And those people I can help.
But lately, I’ve been hearing more and more of the “I bought a house that I couldn’t afford at an interest only mortgage and help, now I’m in trouble!”
The answer? Take away the tax consequences. Whereas before, debt forgiveness was subject to taxation, the bill relieves all related consequences. You can read more from my colleague at Roth PC here.
The new “tax cut” means significant loss of revenue to the Treasury. To make up for the shortfall, the committee has approved restrictions on capital gains tax benefits available to second home owners who convert their vacation homes to primary residences. In other words, to paraphrase my colleague, Congress is offering a tax break to folks who can’t pay their debts by taking away a tax break for folks who can. Interesting concept, no?
- Should we pay for the mistakes of others?
- Ask the taxgirl: Mortgage Forgiveness
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- Paulson Changes His Tune (Again)
- Preparedness 101: What Not To Do In 2012 As Tax Rates Creep Up