Mortgage debt forgiveness: Are you liable for phantom income?
In general, the IRS treats forgiven debts as taxable income. This is commonly referred to as phantom income because a forgiven debt is not cash in your pocket, although it may be taxable as such. But in 2007, Congress passed the Mortgage Forgiveness Debt Relief Act to provide taxpayers with relief for debts forgiven in connection with short sales and foreclosures of certain qualified residences. The Act is currently in effect through 2012. By receiving, properly completing, and filing particular tax forms, a taxpayer can claim protection under the Act and avoid tax liability for phantom income which is typically otherwise reflected in a Form 1099. The Act applies to loans obtained to purchase, build or improve one’s qualified principal residence. The Act also includes certain debt that was incurred through refinancing or restructuring of a home mortgage. In addition, certain types of Arizona loans that are foreclosed or compromised in a short sale may not trigger phantom income as they are non-recourse loans. Consequently, it is very important for anyone involved in a foreclosure or considering a short sale to obtain sound legal real estate advice as early as possible.
The bankruptcy laws also provide safe harbour for forgiveness of debt income. Although we usually view bankruptcy as a last resort for our clients it can be an appropriate remedy for those in financial distress. And the availability of this safe harbour is an important consideration in deciding whether to seek bankruptcy relief.
At Hymson Goldstein & Pantiliat, PLLC, our professionals can help you navigate your options when faced with real estate or other financial challenges. We have a real estate specialist and experienced bankruptcy practitioners who in seeking remedies under the bankruptcy laws act as a debt relief agency. They can provide optimal solutions to help you achieve peace of mind for you and your family. Please call our offices today to learn more about how we can help you in these and other matters.
All Rights Reserved - Copyright © 2004-2020 Hymson Goldstein Pantiliat & Lohr, PLLC
ARIZONA - 14500 N. Northsight Blvd. Suite 101 Scottsdale, AZ 85260 Phone 480-991-9077 Fax 480-443-8854
NEW YORK - 525 Chestnut Street, Suite 203 Cedarhurst, NY 11516 Phone 516-596-8366 Fax 480-443-8854