New Twists Already in Mortgage Forgiveness Act

On Monday I talked about the Seen and Unseen in the Mortgage Forgiveness Act.

New twists have arisen already. For example, the IRS is going to penalize those who rent their homes out before they are foreclosed on.

An IRS website aimed at assisting those facing foreclosure shows the details.

The IRS urges struggling homeowners to consider their options carefully before giving up their homes through foreclosure.

Under the tax law, if the debt wiped out through foreclosure exceeds the value of the property, the difference is normally taxable income. But a special rule allows insolvent borrowers to offset that income to the extent their liabilities exceed their assets.

The IRS cautions that under the law, relief may be limited or unavailable in some situations where, for example, part or all of a home was ever used for business or rented out.

The fact that IRS has a special website aimed at helping those in foreclosure should be enough to tell anyone what the trend in foreclosures is. That said, I have to laugh at this new twist.

The IRS is essentially warning people not to attempt to get out of problems by renting their houses. Someone with debt problems that was thinking about renting out their house or even a room in their house now has a solid reason not to do so: fear of tax consequences. At the margin, this tax interpretation is going to encourage people to walk away via foreclosure vs. taking a chance on rental options.

In addition, several people have Emailed me about possible fraud implications of the new bill. One of them has to do with cash back at closing. The question to ponder is: "If cash back at closing can also be forgiven, won't this encourage fraud?"

Indeed it will, but cash back at closing, highball appraisals, and revised subprime lending are now being closely monitored. I am sure some things will slip through the cracks however, especially fraud by persons seriously in trouble but not yet perceived as being credit risks.

Oh what a tangled web we weave when tax laws are piled on tax laws on top of tax laws.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/