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Citizen Group's "Subprime Survival Kit" Helps Homeowners Cope with Tax Troubles

by Pete Sepp / /

(Alexandria, VA) -- Homeowners caught in a mortgage squeeze should be aware that the tax man can have as much impact on the family finances as their lenders, according to the consumer-education arm of the National Taxpayers Union (NTU). Today the National Taxpayers Union Foundation (NTUF) made available a free, concise article on how taxes can affect subprime borrowers and those who need to sell their homes quickly. The feature is posted on NTU's Web site here.

"Current subprime mortgage lending woes, combined with lower home prices in many markets, can have negative implications for taxpayers who are forced to sell their personal residence or if their lenders foreclose," said Bill Bischoff, a renowned tax columnist and Colorado-based Certified Public Accountant who writes features for NTUF's Tax Savings Report newsletter.

Bischoff, whose work also appears in outlets such as SmartMoney.com, offered numerous tax tips that homeowners often fail to consider when they're in a debt crunch, including:

  • A Phantom Price Gain Can Still Mean a Real Tax Gain. Those who sell their homes at a price higher than they originally paid may still be in the hole if they have leftover debt (such as a second mortgage). Yet, this transaction results in a capital gain that reflects the difference between the price paid and the price sold, regardless of whatever debt may be remaining. At least this gain can be shielded by the lifetime federal income tax exemption for a gain on a residence (up to $500,000 for couples).
  • "Short Sales" Won't Trim Your Tax Bill. A taxpayer who sells his or her personal residence for less than the original buying price cannot deduct the difference as a capital loss (a deduction is only allowed for investment or business property).
  • The IRS Doesn't Forget When Debt is Forgiven. Homeowners who manage to renegotiate terms with their lenders should beware that "cancellation of debt" is taxable income unless it falls under a few carefully defined circumstances.
  • Foreclosure Won't Lock Out Tax Liabilities. The same tax rules (and exceptions) that apply to transfers of property or short sales also tend to apply to foreclosures.

Although Congress and the White House are discussing plans that could ease the tax penalties for Americans who are trying to get out from under a mortgage-debt crisis, Bischoff urged homeowners to be extremely cautious about the tax laws in the near future. "Owing the tax collector in this situation would just add insult to injury," he concluded. "On the other hand, if you can hang in there until the market improves, you might be able to sell your home for a healthy profit and pay off the lender while owing nothing to the IRS. That would be a much better ending."

The 362,000-member NTU is a nonprofit, nonpartisan citizen group founded in 1969 to work for lower taxes, less wasteful spending, and accountable government. Note: "Subprime Lending Woes: How Declining Home Prices Can Have Tax Implications for Unlucky Owners" is available at www.ntu.org. Visitors can also access an NTU white paper entitled What Should Government Do about the Subprime Mortgage Market? A Taxpayer's Guide.

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