A final, post-subprime bust kick in the crotch from the IRS

If your house gets repoed because you can’t keep up on a mortgage, the IRS
wants to tax the amount of the debt you had eliminated.

Foreclosure is one way that beleaguered homeowners can fall into this tax trap. The other is when homeowners are forced to sell their homes for less than the value of the mortgage. If the lender forgives that difference, they are liable for income taxes on that amount.

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 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.

Some people in this predicament are fighting the I.R.S. and winning. Sometimes, lower payments can be negotiated with the I.R.S., tax experts say.

In other cases, bankruptcy or a claim of insolvency can eliminate the tax burden.

Even though you may have some legal recourse, in general, this is ridiculous and non-sensical. And, it’s punitive, as well as being stupid.

It will also contribute to more of an economic downturn, taking more money to buy things out of peoples’ pockets.