In my opinion, the following is must reading for anyone who has had their property foreclosed in 2007 or is possibly subject to it happening in 2008.
Due to the sub prime mess and the fall in property values, an obscure part of the Internal Revenue Code comes in to play. If the debt wiped out through foreclosure exceeds the value of the property, as it will in most instances, the difference is normally taxable income. This just adds insult to injury for those folks who have lost their homes and now would be subject to this "phantom" income.
The lender is required, by law, to send mortgage holders a Form 1099-C, which shows both the amount of debt forgiven and the current market value of the home. A copy of this goes to the IRS so that they are aware of this situation.
Please contact your local congressman and senator so that they can either introduce legislation that changes the tax code or have the IRS issue regulations that, in this instance, no longer consider this situation as giving rise to income, since there really is no income to the mortgage holder.
Also, contact your local tax practitioner for more information and/or ways to mitigate this unfair situation.
