In doing the story, I talked to a lot of folks, lenders and tax experts, read IRS publications, struggled through worksheet calculations and even dug out our own current mortgage documents to double check what our loan committed us to.
It soon became clear how so many folks find themselves in trouble, like some of my neighbors.
Even under the best circumstances, buying a home is a complicated and confusing process. Add in, to borrow a phrase, the irrational exuberance of lenders and borrowers in the last few years, and it's easy to see how a lot of people got in over their heads and are now facing foreclosures and surprising tax bills.
Experience isn't always a guarantee: The hubby and I are in our fifth house. In addition to those five purchase mortgages, we refinanced a couple of them over the years, as well as got an equity line of credit, making us privy to eight home-related financial transactions. Most were fixed rate loans (except for the HELOC, which we used sparingly and paid off ASAP each time).
When we bought our Florida house, though, we took out a balloon mortgage. And by we, I mean me. At that time, we needed a "jumbo" loan (back then, that meant something in the $200,000s) and the bank was offering a much lower rate if we did the 7/23 deal. The hubby, always and forever a 30-year-fixed man (part of the reason I love him is that steadfastness!), didn't like the idea, but as keeper of the checkbook and payer of monthly bills, I prevailed.
I didn't necessarily buy the pitch fully, but was persuaded in part by the words of the lender: "It's not a big deal. You've got plenty of time to redo the loan."
The lender, of course, didn't elaborate on the possibility that if we held the original loan, after seven years we would have to pay the mortgage balance in full or redo our loan on whatever terms were available then. But we knew it. And we thought about it all the time.
Luckily for us, soon after we got in that house, mortgage rates started -- and kept -- dropping. In a couple of years, we did indeed convert that loan to a comparable fixed rate -- now that I think about it, I guess that then puts our official mortgage count at nine -- and I, as instigator of this mortgage adventure, finally got a good night's sleep.
As I said, we were lucky. And we were somewhat experienced. And if worse had come to worst, we could have paid off the mortgage (or most of it if the stock market didn't tank). Today, a lot of folks have gotten into the housing market via ill-advised financing and no background to fully assess possible mortgage pitfalls.
I know, and agree, that a buyer has the responsibility to be well-informed. But even for experienced and informed home buyers, it's a financial jungle out there. And once you're in the house, life sometimes takes unexpected and unhappy detours, turning your dream home into the biggest nightmare ever.
Taxes, but no house: Losing your house is bad enough. Owing Uncle Sam money in connection with your now-gone abode is the epitome of insult to injury.
But there's also the possibility that you could realize a taxable capital gain on a foreclosure. Yep, it's true. Check out IRS Pub. 544, which says, in part:
If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. ... You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized.
There's one of those worksheets I mentioned earlier to help you come up with the bad tax news. I also offer some examples in my story.
The point is, foreclosure doesn't necessarily end your homeownership troubles. It could, in fact, add to them.
Possible Congressional help: As for taxes on foreclosures, there might be some legislative relief from D.C. on the way.
Back in April, Rep. Robert E. Andrews, D-N.J., introduced the Mortgage Cancellation Tax Relief Act of 2007 (HR 1876). On the other side of Capitol Hill, Sen. Debbie Stabenow, D-Mich., introduced an identical version, S. 1394. Both measures would amend the tax code to make debt forgiveness on principal home mortgages nontaxable income.
Since the bills were introduced back in the spring, they have been languishing. No hearings, nothing, by either the Ways and Means or the Senate Finance committees.
But given what's going on, and likely to keep going on for a while, with mortgages and unexpected taxes, that might soon change.