W.C. Fields, a famous comedian, once told a reporter, "When the country runs out of money, we'll just have to print some more." If things were that easy, tax time would be a bigger party than Christmas, Halloween, and the Super Bowl all together. The current state of the US economy, on the other hand, looks pretty bad for all tax payers, but especially for homeowners and renters who have been hit hard over the past few years. When monthly payments keep going up, the last thing people need is to be taxed if they have to leave a home they can't pay for anymore. This is where the new Mortgage Forgiveness Debt Relief Act comes in.
What the Act is all about.
The Internal Revenue Code of 1986 was written in a way that didn't help home owners who were trying to avoid foreclosure. For example, the IRS would add "discharges of debt" to the owner's gross income. The new bill, which was passed by Congress on December 14, 2007 and signed by the President six days later, takes care of this extra burden by giving these amounts a three-year break from being counted as income.
In other words, if your family is trying to get out of debt without losing everything, the government won't make things worse by taxing whatever amount you were able to cut from your total debt.
In everyday language,
When a person can't pay their mortgage and has to sell their home, sometimes the sale price is less than what was paid for it. For example, if you agree to pay $100 for an item that you can't sell for more than $70, you still owe $30. Since banks and their managers value money, they usually think it's better to take a little less than lose a lot. Many of them will let you sell at the lower price and "forgive" the difference. The IRS, on the other hand, sees that forgiven amount as income for the seller, so it is taxed as if it were new money. That doesn't sound too bad for a $30 difference, but very few home loans are made for less than $100. Things look different when the home is paid off for more than $100,000.
The Act of 2007 lets home owners accept the bank's help without worrying about the Internal Revenue Service coming after them. This gives them a little breathing room to get their finances back on track. Debts that were forgiven between January 1, 2007, and January 1, 2010, won't be taxed. The "overlooked" amount could be as high as two million dollars, and the IRS won't try to get their share.
What it means for all of us.
The result will help homeowners negotiate the sale of their property, even at a loss, so they don't have to go through foreclosure. After all, banks are in the business of making money, not reselling homes. If there is a way for them to negotiate, even if it means taking a small loss, and avoid a long process or taking away your assets, they will go the extra mile to meet you halfway. So, not only do you have a chance to keep from going bankrupt, but you may also be able to break even on the whole thing and avoid a few years of bad credit.
First-time home buyers will also feel the effects. Normally, they wouldn't even think about buying a home, or if they did, it would put them on a path to bankruptcy. On the real estate market, there could be a sudden influx of cheap homes that need to be sold quickly. There would be enough demand to match the increase in supply. In other words, things will be going well with the economy.
Who does it really apply to?
The temporary changes to the 1986 code have to do with a mortgage used to buy a main home and with mortgage debt that is forgiven during a three-year period. The home must have lost a lot of value, and the owner's finances must be in a certain range to qualify.
In addition to helping with mortgage relief, the Act includes steps to help home owners who are more likely to lose their money. Within two years of the death of the other spouse, the surviving spouse can keep up to $500,000 from the sale of joint property. Also, some single parents who go to school full-time will be able to get low-income housing, as long as their children don't get help from outside sources. Also, volunteers who help with emergency services like firefighting or medical units will be able to keep any local benefits that come from their work.
After everything is said and done, the Mortgage Forgiveness Debt Relief Act of 2007 is expected to help more than 300,000 Americans who are having trouble keeping a roof over their heads. They will have 3 years to change, rethink, and renegotiate their loans.
Now, about this idea to print money...
