Phantom Income Bll Update:

In a move to relieve some of the burden that faces homeowners filing for foreclosure, the US House of Representatives voted to remove a tax penalty known as "phantom income" tax.

Under present rules, if a lender or creditor forgives all or part of a debt due to a foreclosure or short sale , the amount forgiven is seen as income by the IRS, which is taxable.  The IRS requires lenders to send a Form 1099 reporting they cancelled the debt to any homeowners that foreclose or participate in a short sale.  The IRS turns around and taxes the homeowner on the "phantom income."

Another portion of the new bill would extend mortgage insurance deductibility through 2014.  The current version of this bill is only effective for homeowners who bought in 2007.  The guidelines on the current law for PMI deductibility will remain the same - the home must be a new purchase and the homeowner's adjusted gross income must be less than $110,000 annually to deduct the mortgage insurance premium paid.

The new bill will now move to the Senate, where a similar bill is in the works.  The White House supports the bill, but wants to limit the tax relief to three years, whereas the current proposed bill would be permanent.

Another positive side of the bill is that it is retroactive to January 1, 2007.  Homeowners who fell behind or have foreclosed this year will be able to avoid the phantom income tax under the bill as it currently stands.  There is no proposed relief for homeowners who foreclosed in 2006 and earlier.