It boils down to the concept of unjust enrichment. When someone does not pay a debt or a debt is forgiven, the IRS sees this as effectively income. You no longer have a debt to pay and someone or some business is going to look to write that loss off against income thereby reducing revenues to the IRS. Why should you get a hall pass on the debt is the thought process. You have received some past benefit from this debt. If you no longer have to pay the debt, you have therefore been unjustly enriched and that is seen as unfair in the eyes of the tax authority. The requirement to treat this unpaid or forgiven debt as new taxable income simply injects balance and cancels out the unjust enrichment. Businesses are required to issue a 1099C for forgiven or unpaid mortgage debt. Whether you have a tax liability or not, the law says that the banks and lenders must report.
Today, due to the last minute extension of The Mortgage Debt Relief Act that has been extended through calendar year 2013, the grand hall pass is still available for the brave soles seeking a real solution. Why do I say brave souls? It’s hard to make a decision to solve a problem with an underwater property and decisively move forward with a short sale. It also takes cooperation and several months to sometimes a year or more to complete properly. It’s much easier to deny that you have a problem and do nothing. A Short Sale may be the best financial decision but there are still thousands of people that choose to do nothing in spite of the grand hall pass.
How significant is the hall pass on the debt forgiveness that extends to the end of this year? We have had clients where we have mitigated collectively more than one million dollars of unpaid mortgage debt across several owned properties. Under normal circumstances, that would equate to one million dollars in income multiplied by your tax rate of approximately 35% equating to $350K in tax due. Let’s forget who would want to have to fight with the IRS over this issue. Who has an extra $350K lying around to pay the extra tax? Don’t you just love getting a letter with an IRS logo on the top left? Nothing like it when in comes with the Saturday mail.
The answer is nobody. So the choice most people would make would be to do nothing in order to avoid the tax. This would, in essence, not fix anything and the real estate issues would continue to stagnate on your personal balance sheet. Given the magnitude of the housing crisis, and the sheer number of people caught up in it, the real estate market would also continue to stagnate. The effect on the economy would be devastating. The residential real estate market is too large a percentage of our economy not to create an incentive for individuals to fix their own problems. The incentive, if understood, could actually be as large a benefit to an individual’s financial profile in importance as it is to the economy as a whole.
Here in lies the concept behind the extension of The Mortgage Debt Relief Act. Do you really think the government is happy about handing out hall passes by the hundreds of thousands and spreading around unjust enrichment like free candy on Halloween? Of course not, but there really is no other choice. If you take this to heart and grasp the concept you will see that there is a very nice window of opportunity to get out of underwater properties that turned out to be wicked investments with minimal loss. After all, as a relative comparison, where can you lose several hundred thousand in a poor stock buy with your brokerage firm bought on margin and claim you can use a mulligan to limit your losses to only your principle buy in? It doesn’t happen in the real world unless there is a crisis and an incentive has to be put in place for the greater good of the economy. Given the last minute extension of the Mortgage Debt Forgiveness Act the opportunity to address underwater properties without punitive tax consequences still presents itself.
Please allow me to inject a bit of antidote to settle your moral character issues that are conjuring as you read. Yes all sides and factions in the government were complicit in allowing the crisis to develop and unfold. The people were sacrificed and the banks and lenders broke the laws repeatedly only to pull out their check books with no admission. The people got destroyed but big business like the apostle to the devil himself, Bank of America, continue to do what they want and pay as they go. Everyone has heard about illegal foreclosures, or people getting thrown out of their homes or screwed to the wall with the loan modification process. Has anyone heard of any Arthur Andersen type federal indictments on the lenders or criminal prosecutions? I certainly haven’t. There is just a lot of money moving around and we all know big lenders and Wall Street are necessary to foster a real economic recovery. From a financial perspective this means you must draw the battle lines. You don’t need a thirst for conflict or a deep dark desire to slay the armies of the lenders. That’s my job and please do not think about taking it away from me. All you need to do is think about the opportunity the extended debt relief incentive provides and make a decision.
This incentive is in place for one more year. It’s a hall pass to rob the bank with no jail time in my opinion. Work smart and you could turn out to be a fine magician. We can help you get rid of a lot of bad investments in underwater property and live to fight another day. We welcome you to visit our site at www.thenegotiatedsolution.com or our sister site at www.jeffersonmortgage.com to investigate. We can’t change the past, but we can provide you the expertise and wisdom to make the future brighter for you financially. It’s all about the future.
Blogging form the front line of the housing crisis.
George Omilan
NMLS#873983
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