According to a recent post in the
Equifax Personal Finance Blog, one of every 136 American homes received a foreclosure notice in the third quarter of 2009 (attributed to a statistic from RealtyTrac). For those who had some or all of a home loan cancelled after deeding the home to the bank, participating in a short sale or going into foreclosure, it’s possible the nightmares haven’t ended. Some of them are still being haunted by a tax on phantom income.
The post, “
Phantom Income from a Short Sale or Foreclosure? TaxMama Gives You Two Ways to Avoid the Tax,” explains that phantom income (or the income that isn’t actually in your bank account) arises from the cancellation of indebtedness. You used to owe $100,000 and now you don’t? Well, you must have made $100,000 in income, right?
According to tax expert Eva Rosenberg, aka TaxMama, homeowners affected will receive a 1099-C, Cancellation of Debt or a 1099-A, Acquisition or Abandonment of Secured Property form in the mail. But she says not every homeowner will have to pay up, thanks to the Mortgage Forgiveness Debt Relief Act of 2007. For debts defaulted from 2007 through 2012, the phantom income will not be counted if the loan was taken to purchase, build or significantly repair a principle residence.
For homeowners who refinanced, the Debt Relief Act may not take care of the entire tax bill. If a mortgage was refinanced and the money was used for the principal residence, the tax forgiveness applies only up to the amount of the previous mortgage principal just before it was refinanced. In other words, if you refinanced one day for a greater amount than you owed the day before (perhaps to make home improvements or to pay off credit cards), your phantom income tax forgiveness applies only to the amount you owed before you refinanced.
According to the
Equifax Personal Finance Blog, there may still be a way out – proving insolvency. Tax expert Eva Rosenberg (aka TaxMama) explains it well and provides links to both the appropriate forms and the Taxpayer Advocate Service. If you’re haunted by phantom income, check it out before Uncle Sam makes you pay.
