The Cost of Forgiveness: When the IRS is Involved

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In a lengthy article by one Jaime Dermody on how to fix our current financial mess, he says the following:

(E.) Congress accommodates (B.) above by amending the Mortgage Forgiveness Debt Relief Act of 2007 to waive recognition of ordinary income for debt forgiveness on primary residences only if:

(E.1) borrower obtains consent of a servicer or substantial holder of the mortgage, or a bankruptcy court, associated with the debt in question; or

(E.2) demonstrates to the IRS that he or she was the victim of any predatory lending.

This will remove the incentive to misuse SCICS described in Subsubsection (2.1.3) above, except where it is part of a resolution or untoward lending.

This mention of a waiver illustrates a little-known aspect of our internal revenue code: as a general rule, if a debt is forgiven, the amount of the forgiveness is taxable income to the beneficiary!  Other people’s forbearance (irrespective of the motive) becomes your penalty!

Our government at work.  And yes, you need to see your tax professional if you think you’re subject to this.  (Other terms and conditions of this site are here.)

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