Zeev's Turnips Patch-No Politics (ZEEV)

[Koog]

Mortgage Debt Forgiveness Act

A new federal tax law provides a strong financial incentive to go ahead with a short sale.

Before 2007, if someone lost a home in foreclosure or was forced to sell for less than the loan amount, the Internal Revenue Service figured that that person owed the government for a phantom profit -- tax on the money he or she did not have to repay.

But under the Mortgage Debt Forgiveness Act, signed by President Bush in December, this "debt cancellation income" is forgiven for 2007-09, and is not taxable.

"Until recently, the problem with the short sale was they would have a phantom tax they had to pay," said said David Agee of the Bradenton law firm of Reed and Agee. "Because part of the problem with a short sale is: 'I am somebody in trouble. I can't pay for it.'"

In the case of Tim Knopf -- the Palmetto resident who just went through a short sale -- the IRS might have held him liable for the difference between the mortgage debt of $279,000 and the sale price of $214,000, or a whopping $65,000 in phantom profit.

"I have a feeling this will encourage people who are in trouble," Agee said.

-- Michael Pollick

http://www.heraldtribune.com/article/20080302/REALESTATE/803020643