No One Should Pay Taxes on Phantom Income

After announcing the details of the U.S. Department of Justice’s settlement with Bank of AmMortgage-Forgiveness-Debt-Relief-Acterica, which includes $7 billion in relief to consumers  U.S. Attorney General Eric Holder lamented Congressional inaction to extend the Mortgage Forgiveness Debt Relief Act.

For homeowners meant to be helped by the settlement funds will instead be penalized on their income taxes.  Holder called on Congress  to do the right thing for financially distressed American families who lost homes to foreclosure or short sales this year.

The tax relief expired on December 31 last year,  and unless Congress acts to extend it, every person who has already sold or plans to sell a home in a short sale in 2014, will pay taxes on nonexistent mortgage debt, which is money many don’t have. Taxing forgiven mortgage debt as income is an unfair practice that also incentivizes defaults and foreclosures, which could torpedo the housing recovery.

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