Forgiven Mortgage Debt should not be considered as an Income

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Date added: 17-06-26

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Forgiven mortgage debt should not be considered as an income and people should not be taxed based on that because those who are in this situation already are in trouble and basically “underwater”. Taxation based on forgiven mortgage debt causes business unfairness and a lot of troubles for our economy in general and especially for lower and middle class families as well as for first time home buyers. During the economic recession which started in 2007, many people lost their job and many of them ended up losing their homes as well because of financial problems. Many of these people who had mortgage loans had trouble paying it, also many of them owe more on their mortgage than their home is worth it. Homeowners who were underwater they were able to sell their houses in short sale which means they sold their homes for less amount of money that their mortgage was and this was done with the bank agreement which allowed them to do so. The number of these underwater homeowners is decreased, however a lot of people still are struggling with their mortgage payments and according to IRS the number of tax fillings for mortgage debt exemption from 2007 until 2011 is increased. Difference between mortgage and forgiven debt is considered as income by government and is taxable, even though is “phantom income”, income that you do not get in reality. Example, someone who owns $150,000 on his/her mortgage and they agree with the bank who lend the money to sell the house in short sale for $100,000 the difference which is for $50,000 is considered as an income and this difference is taxable. Mortgage Forgiveness Debt Relief Act was granted temporary by Government in 2007 until 2009 by President G. Bush and was extended twice by Obamas administration, first until December 31, 2012 and second until December 31, 2013. This Act was more than welcome for all those people who were down on their luck financially. According to this some people may argue that mortgage forgiven debt should be taxable just like government thinks, regardless that those homeowners who came to this situation to sell their homes in short sales are people who did a lot to keep their homes and they have different reasons for doing it. Many of those people have lost their job due to a bad economy and simply cannot afford the home anymore. Sometimes there are large medical bills that suddenly came into play, also divorce can cause financial hardship. There are dozens of other legitimate reasons why someone is unable to afford his/her home. Simply these people are not "dumb" and didn't read what they were getting themselves into. I personally know people that I have worked with and that they lost their homes, they did not lose their home because they are not intelligent or they are not very well educated people actually they are very intelligent and educated people but it happen that they got themselves into a very sad and unfortunate situation e.g. one of them got divorce and couldn’t effort to pay the mortgage by them self, also we have families who went through medical problems and so on. However; this bad situations some of them they survived somehow to keep their homes till now bur after expiration of the mortgage forgiveness debt relief act many of them are going to get tax bill on their phantom income. In interview given for New York Times, Senator Isakson said that “forgiven debt was nothing more than “phantom income” and should not be taxed. …is unfair to end the exemption for those families who have manage to hold on their homes.” And more over he stated that “These are the people who have tried the hardest to hang on their homes and keep the economy strong”. [Shaila Dewan “NYTimes”] When I mentioned at the beginning that taxation based on forgiven mortgage debt causes business unfairness is that there are other common situations in which cancellation of debt is not taxable example Bankruptcy where debts discharged during this process are not deemed taxable income. Moreover, we have to make difference between those people who bought house for investment, and people who they took out a home equity loan and took that world trip that they’ve been dreaming of instead of using the money to improve their house from those who bought a house to live in it and invested in it. So here is a big issue government should make difference between these categories. I agree with K. Phillips when she question about exclusion that” …why keep putting a band-aid on it? Why stop with one year? Why not five years? Or ten years? Why not make it a permanent exclusion?” [K. Philips Erb “Forbes”] making permanent exclusion is the best way to help at least those people who worked hard to keep their house such as those people who invested in their house and faced finance troubles because of their unfortunate situations. It is clear that debt forgiveness is effective at preventing foreclosure. There's an obvious reason and a not-as-obvious reason that principal reductions result in fewer foreclosures. The obvious reason is that less debt equals a smaller monthly payment. People get modifications because they have trouble making their mortgage payments, so smaller payments tend to help. I'm just curious as to where IRS expect a homeowner to come up with $25-100,000 to pay for taxes when they can't come up with $1,000-1,500 a month for a house payment. It's not like they can go to a bank and get an unsecured loan, their credit score has just taken a 150 point hit according to Credit Score regulations. By taxing these people for their forgiven debt government not just is going to make extra trouble for these category of peoples but it is going to make more dependent people to government; example maybe many of them that they will end up asking for help from government e.g. asking for food stamps because of their financial problems. In one way IRS is collecting some extra money but on the other hand government is making people more dependent on food stamps or on other government programs. One thing is clear that if government is not going to extend mortgage forgiveness debt relief act many lower and middle class families as well as first time home buyers are going to be in trouble because of many reasons that were mentioned above and “Housing advocates argue that not extending the Act is simply bad policy, punishing those already facing serious financial difficulties and pushing off a potential recovery in the housing market.” [K. Phillips Erb] I understand your frustration with others seemingly getting "free" money because of a tax exemption. What you maybe aren't thinking about are the various reasons for a short sale. I have helped multiple families with short sales, and they have different reasons for doing it. Many times they have lost a job and simply cannot afford the home anymore. Sometimes there are large medical bills that suddenly came into play. A divorce can cause financial hardship. There are dozens of other legitimate reasons why someone is unable to afford his/her home. Was some of this due to inflated housing prices? To an extent, sure, but I don't think that very many of us could foresee how drastically prices would fall from their peak in 2005-06. I also reject the notion that all of these people that have found themselves in this situation were simply "dumb" and didn't read what they were getting themselves into. The people that I have worked with are very intelligent, educated people who got themselves into a very sad and unfortunate situation. I'm just curious as to where you expect a homeowner to come up with $25-100,000 to pay for taxes when they can't come up with $1,000-1,500/month for a house payment. It's not like they can go to a bank and get an unsecured loan, their credit score has just taken a 150 point hit. And yes, most of them tried to refinance/restructure their loans with the bank, but were declined or the offer they were given was not any better than their current situations. Maybe one of you will loan it to them? All this is due to faulty trickle down economy . We dont need this trickle down economy (Top Down Approach) anymore in which bankers get money from govt. then spend it as they like and do all kinda ponzi business, sub-prime crisis , etc etc. Now due to the fear of collapse they want more free money from govt. Why , why should they be rewarded for the problem they created in the first place . Is US govt. their puppet? Is the govt. by the bankers , of the bankers & for the bankers. Or are these bankers have united as a secret organisation to squeeze out as much money from US govt. and US citizens. These bankers & fat capitalists should be allowed to rest in peace (RIP) and US govt should change their economic policy drastically by accepting the Bottoms UP Approach in which govt. gives sustenance allowance DIRECTLY to each citizen's bank account. This is because govt. is the only institution that can create free money. People no longer need jobs and factories should be run by robots completely. Only niche areas should have jobs such as robotics & research but that also by the committed dedicated interested people. Since money would go directly to bank accounts of individuals, the money is still with banks. But now bankers and industries would have to provide quality products and services to earn that money from the individual citizens. So with this approach all poverty , hunger, homelessness, unemployment will vanish. This will be true democracy. None of this changes the fact that people signed a contract stating they would pay the bank "x" amount of dollars. If I bought ABC Company stock for $60/share and it plummets to $20/share, do I get any money back, no I do not. If I sign a legal document stating I owe "x" to the bank and they pay the difference on my behalf, why shouldn't I have to pay taxes on it? After all, I am the one who signed the note promising to pay them back. Sites: Dewan, Sh. (February 4, 2014). Welcome Relief for Homeowners, Until the Tax Bill Arrives. In The New York Times. Retrieved February 10, 2014, from http://www.nytimes.com/2014/02/05/business/economy/lenders-see-write-off-while-underwater-homeowners-face-stiff-taxes.html. Kelly, K and Rich, S. (December 30, 2013). New Maryland bill could shorten debt collection after foreclosure. In The Washington Post. Retrieved February 10, 2014, from http://www.washingtonpost.com/investigations/new-maryland-bill-could-help-foreclosed-homeowners-avoid-lengthy-debt- Swanson, J. (January 24, 2014). Official Argues Against Short-Sale/Foreclosure Deficiency Counting as Income in 2014. In Mortgage News Daily. Retrieved February 11, 2014, from http://www.mortgagenewsdaily.com/01242014_loan_modifications.asp. http://www.forbes.com/sites/kellyphillipserb/2013/12/27/tax-break-ending-for-underwater-homeowners-is-it-the-right-time/
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