Familiar?

Let me give you a quick idea of what it is. Keep in mind that I am not a tax professional, or a lawyer… just a real estate agent.

I guess the easiest way to say it is that it is phantom income. For our current purposes, let’s look at a short sale. Let’s say that the seller owes $300,000 on their home. In the short sale, the property sells for $225,000. Obviously the difference is $75,000. When the bank takes the loss, they report the write-off as income to the “recipient”, the seller. So, that year they get a huge income boost. And they owe taxes. Nice, huh?

Congress is working on altering the tax laws so that people aren’t stung by this in many cases. We’ll see what happens.

But, that’s not all…

A few years ago, a plan was floated to Congress to actually expand imputed income. Some lobbyists felt that there were people that were “unfairly” gaming the current system, and taking advantage of others. How were they doing this, you ask? They bought homes to live in.

You see, these people weren’t paying increasing rents. Instead, their fixed rate loans had largely the same payment for years. So, while renters were facing increased rents over time, homeowners had the same payment until they moved or {gasp} paid off their homes. That isn’t fair, is it? (trust me, I am shaking my head…)

What to do? Well, figure out what the market rent would be for a homeowners property, and then charge them the difference as imputed income. So, our villain (Biff the homeowner) pays $2000/mo. for his house payment. If he were to rent a similar house, the cost would be $3000/mo. So, obviously our villain is getting over. He is saving $12,000/year compared to the less fortunate (those would be the renters…). So, maybe he should have to pay tax on the extra income.

Luckily, some of our congress critters figured out that they would be committing suicide at the ballot box if they actually tried to implement something like that. Not to mention that every extra penny collected would be swallowed up by the new agency that would have to figure out the rental value of every owned home in the US.

ggrrrr..