Bush’s latest bill signed into law lets irresponsible home owners who borrowed too much money, paid too much for their home, spent the equity in the home like it was free money from an ATM machine and squandered it all, off the hook. Normally, if you are forgiven payment on a debt, the IRS makes you pay tax on that balance. Now a borrower can walk scott free from their house, not pay back the mortgage and not pay tax on the forgiven debt. Bush’s legacy will be that he allowed deadbeats to get away with murder. What kind of message does this give to America’s kids? How is this moral? Bush is really becoming a liability to the Republican Party. Wait til next November and see who wins office. Thanks George, you’re the best Democrat ever to take office.

By Jim Wasserman – jwasserman@sacbee.com
Published 5:49 am PST Friday, December 28, 2007

For households mired in mortgage troubles, there’s one less worry this year.

That’s the nasty tax consequence of avoiding foreclosure by selling a home through a “short sale” or other loan rearrangements.

A bill signed by President Bush last week lets homeowners off the hook for a little-known tax bite that occurs when mortgage debts are forgiven. The reprieve applies to households that use short sales or other mortgage relief efforts during 2007, 2008 and 2009.

The National Association of Realtors is among those saluting the president’s action, calling it “an issue of fairness and not kicking people when they are down.”

First, the definition of a short sale. It’s where the bank agrees to accept less than it’s owed when a home sells. These sales, which enable banks to avoid the even costlier process of foreclosing and selling the house in a declining market, have become increasingly common this year.

Under the standard short-sale scenario, if you sold your house this year for $350,000 but owed the bank $400,000, you’d have hefty tax consequences in 2008. The IRS would count that $50,000 in canceled debt as taxable income. It’s what’s known as “forgiven debt” and typically triggers a 1099 tax form.

But now, the IRS is required – for three years – to abandon its traditional tax rules on canceled debts. The moratorium also applies if a lender forgave some of your mortgage debt through a loan workout.

It’s a temporary measure during this real estate slowdown and is only for loans involving a primary residence. It does not apply to investor-owned properties.

The hope is that without the fear of incurring an IRS tax bill, more struggling borrowers will call lenders and negotiate alternatives to foreclosure, according to the real estate industry, which backed the bill.

In the capital region, one short-sale specialist praised the move but said it won’t really bring much debt relief.

“Many of these people weren’t going to pay the tax, anyway,” said Scott Thompson, a partner in Mortgage Resolution Services in Carmichael. “There was a part of the tax code that granted them immunity if they were insolvent.”

But, he added, it’s “clearly a good thing” that people already under financial stress won’t have to worry about additional tax problems.