Your government
The stupidity and money lust of our government never ceases to amaze me.
By now you’ve probably heard a lot about “short” sales of homes in today’s distressed market. A short sale is when the house is sold for less than the amount mortgaged and the bank forgives the debt as part of the sale. This is often cheaper for the bank and avoids foreclosure and other headaches for bank and homeowner.
The cancelation of debt isn’t taxable if you live in the home. BUT it is taxable if it isn’t your primary residence or if it is investment property.
That is idiotic. Exactly where was your “income” in the arrangement? The only person who made money in the deal was the lucky guy who sold you the house during the boom.
You, as the buyer, put some % down, took a loan, and hope to sell it at a profit someday, perhaps while earning income from renting as you waited for appreciation to take hold.
So you do a deal, and lets say you lose $20K you put down and the bank cancels $100K of debt. You are out $20K cash. The bank is out $100K.
But… wait… according to the IRS you owe taxes on $80K. But who has that money? The guy who sold you the house. He made the money, yet he owes no taxes. You lost $20K and yet you get to pay an additional $30K or so in income taxes. Ridiculous!
The only way around it is to declare bankruptcy, which you can’t really do if you have income and assets.
There wasn’t any income to tax, that is OBVIOUS. To tax a loss is stupid. It’s mean. It kicks people when they are down.
Which, of course, is what the IRS is all about.
March 12th, 2009 at 7:46 am
Let’s ID the real culprits. The IRS is an executive agency that executes the laws enacted by Congress. As an Executive Branch agency it has the “additional duty” of taking the heat for any unpopular working of laws. In this case, I strongly suspect that the definition of taxable “income” from forgiveness of debt is written directly in the tax code. If you owe me $10000 and I forgive it, you received an increase in your net purchasing power, a financial gift of $10000. The tax code explicitly defines taxable gifts. How you got yourself in the hole that induced the gift is irrelevant. The effect is the same as your receiving a $10000 check and handing it to the lender to reduce your debt. If you don’t like such a law, take your complaint to Congress which has the power to change the rule.
March 12th, 2009 at 8:45 am
You obviously haven’t dealt with the IRS. I have, and they make up the rules as they go along. They also have their own captive court.
Sure this is Congresses “fault”, but if people weren’t willing to go out and do their dirty work it wouldn’t happen. The IRS is full of mean spirited evil people screwing others for a government pension.
Your confuse defining the “tax law” with my point that it is idiotic. I don’t care what the law says – if it says you own income tax when you had no income then it is stupid.
Sigh.