Monday, August 20, 2007

Noted in passing

It's not one of those big things, I suppose, not one of those Earth-tremor issues that moves people to organize and protest; not on a level with Iraq or Iran or FISA or the continued ignoring of New Orleans. But it still seems an outrage, a shameful thing that I could not let pass without mention. From Monday's New York Times:
Two years ago, William Stout lost his home in Allentown, Pa., to foreclosure when he could no longer make the payments on his $106,000 mortgage. Wells Fargo offered the two-bedroom house for sale on the courthouse steps. No bidders came forward. So Wells Fargo bought it for $1, county records show.

Despite the setback, Mr. Stout was relieved that his debt was wiped clean and he could make a new start. He married and moved in with his wife, Denise.

But on July 9, they received a bill from the Internal Revenue Service for $34,603 in back taxes. The letter explained that the debt canceled by Wells Fargo upon foreclosure was subject to income taxes, as well as penalties and late fees. The couple had a month to challenge the charges.
You lose your home. Your credit is ruined. Your life turned upside down. As far as the IRS is concerned, you made money on that deal and it wants its cut.
The 1099 shortfall, as it is called, stems from an Internal Revenue Service policy that treats forgiven debt of all types as income even if the taxpayer has nothing tangible to show for it, unless the debt is canceled through bankruptcy.
The same thing can happen if you are forced to sell your house for less than the value of the mortgage. If the mortgage holder takes what you got for the house and forgives the rest of that debt, to the IRS, that's income.

That's stupid.

I can see the IRS wanting to avoiding letting people get away with dodgy deals involving forgiving loans to people who are capable of paying them back, which could be used for money-laundering or simply as a scheme to avoid taxes. (Instead of giving someone money, you "loan" it to them and later "forgive" the debt.) But to do it when people have lost their homes, when the debt is forgiven because the debtor can't pay it back, when, as the Times article notes, "the taxpayer has nothing tangible to show for it," to add this - well, I was going to say insult to injury but this is about real money, so it's injury to injury - is worse than ridiculous.

Stout may be okay: Wells Fargo was able to resell the house for the $106,000 he owed and says it is filing an amended 1099 showing no debt forgiven, since the full amount was recovered. Still,
[t]he Center for Responsible Lending expects that 20 percent of the home loans made in 2005 and 2006 to people with weak credit, commonly called subprime loans, will end in foreclosure. Because so little money was required as a down payment during the boom, the value of many of these houses may be less than what is owed.
So let's say you wind up with a $150,000 mortgage on a house valued at $130,000. You get sick, you lose your job, whatever. You can't make the payments. The house falls to foreclosure. It's sold at auction for $120,000. The mortgage company forgives the rest of the debt (and why not, it knows it's uncollectible). According to the IRS, you have just received $30,000 in income.

Like I said - that's stupid. Worse than stupid, inhumane. Not that humanity and the IRS are exactly on speaking terms.

The article notes how some people are fighting the IRS and even winning. But the point is, the battle should not have been necessary in the first place.

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