Here's an interesting quirk in our tax code.

The current tax code requires a lender who forgives a debt to provide a Form 1099 to the IRS stating the amount the borrower has been forgiven. This disclosure applies whether it is a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement that relieves the borrower of the obligation to pay some portion of their debt. If the property is sold at foreclosure or is sold for less than was borrowed, that difference is considered income and is subject to the tax.

Let me try to make it easier to understand. Say you owe $200,000 on your mortgage loan, but the bank forecloses on your home and ends up selling it to someone else for $180,000. You'd owe income tax on the $20,000 difference, because you basically were "given" the $20,000 to pay off the loan.

Not a very common occurrence, right? No, not even in this day of increased foreclosures.

The National Association of Realtors, always on the side of consumers, wants the tax laws rewritten so that this "money" is considered tax-free.

“NAR stands strongly with the Senators and the bill they introduced today. It addresses a fundamental unfairness in the lives of those who find themselves in truly unfortunate circumstances."

Unfairness?

What do you think? Should borrowers have to pay tax on this "phantom money" or is losing their house more than enough hardship?

Source: NAR: Do Away With the Phantom Tax - Realtor.org