Sub-Prime Crisis: Landlords Unduly Pressed

Posted in Foreclosure Crisis, October 1st, 2007 |

Everybody has heard about it. The Congress will plug the sub-prime crisis. The Democrats are in the forefront. But their medicine of shuffling taxes seems to take it off the shoulders of one group and putting it on those who are in the clear as regards payment of mortgage dues.

Today a foreclosure sale is taxable income. The borrower gets from the bank a certain amount. This amount attracts tax. Even if the bank does not give anything but rather forgives a part of the loan then that forgiven-amount is taxed. Under the new bill income from foreclosures will no longer be taxed.

Critics opine that such a step would invite reckless borrowing. However on humanitarian grounds it seems a just move.
The tax story however does not come to a simple happy ending in this way. But tax spared from this end must be replenished in another way. The government coffers must not run dry. The thrust is on targeting small landlords and owners of second houses – who need not necessarily be wealthy. It is not unusual or a sin to buy a second property as investment during a housing boom.

There are about 1.6 million absentee house owners only in Washington metropolitan area. Take the instance of one person who is renting out the second unit because it is impossible to get a fair price in the present market. In this way he will survive through a bad economic patch and not go for a sale that will incur heavy loss. In fact – given the present rise in rental units there is a good chance of making some honest money.

As per current rules if the landlord has bought the house for five years and of these years he has spent two residing in it then he gets a tax exemption of $500,000 for married couples and $250,000 for single persons. It has been encouraging people to go in for buying. This together with other factors like mortgage interest deduction has played a strong part in the housing boom. But the new bill will change all that. The 2/5-year period will be scaled back and any equity from rental or sales during this period will be taxed. The landlord will be spared only for the time the unit was occupied. Millions will be adversely affected by this change. So is the step a panacea at all?