H.R. 3648 - Tax relief on forgiven debt for those facing a short sale or foreclosure.

Certainly the Scottsdale real estate market hasn't been immune to the woes that have insued due to the subprime mortgage meltdown in recent months. More and more homeowners are faced with the dilema that their mortgage interest rates and payments have gone up, while their property values have declined.  Although most homeowners would love to keep their home, the reality of the situation is that they simply can't afford to do so. This has led to an increase in short sales and foreclosures across the country.

On December 20th, President Bush signed into law H.R. 3648, otherwise known as the mortgage forgiveness act of 2007. Although, this legislature won't help current owners keep their home, it will provide relief in certain cases to what's known as "phantom income." So what is phantom income you ask? Here's a typical scenario. Let's say you owed $300,000 on your existing loan, but the value of your home in the current market is $275,000. Your lender may agree to a short sale, or settling for $25,000 less than what's owed on the mortgage. In essence forgiving your $25,000 debt to the bank. Now, the part that most people don't know is that in many cases banks will issue a 1099 taxing the home seller for in this case the $25,000 of debt forgiveness. 

H.R. 3648 will provide relief for many who are facing this situation. H.R. 3648 went into effect January 1, 2007 and will continue through January 1. 2010. The law was created as a fix to a temporary problem. As with any law, certain conditions apply, so be sure to talk with a tax professional for specifics.

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