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Lending / Servicing / The Ticker

Huge tax bill for homeowners who receive BofA settlement?

The relief could be too good to be true

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As part of the record $16.65 billion settlement between Bank of America (BAC) and the U.S. Department of Justice, approximately $7 billion is designated to provide relief to consumers.

In a statement, the U.S. Department of Housing and Urban Development outlined how some of that money will be disseminated to the consumers.

“The $7 billion in consumer relief will focus on areas that were hardest hit during the housing crisis,” HUD said. “Consumer relief will take various forms including loan modification for distressed borrowers, including FHA-insured borrowers, and new loans to credit worthy borrowers struggling to get a loan in hardest hit areas, borrowers who lost homes to foreclosure or short sales, and moderate income first-time homebuyers.”

But for the borrowers that reap the rewards from BofA, there could be something that severely dents the promised relief funds, a huge tax bill.

The Washington Post highlights the seriousness of this issue.

In 2007, Congress adopted a law that spared homeowners from being taxed on the amount of the loan that was written off. But that tax break expired in December, and now that kind of relief can be counted as income by the Internal Revenue Service.

"That’s why the Department secured a commitment from Bank of America to pay a portion of the settlement – over $490 million – to defray some of this tax liability," U.S. Attorney General Eric Holder said. "And our settlement requires the bank to notify all consumers of the potential tax liability."

Holder went on to warn that unless Congress acts, "the hundreds of thousands of consumers we have sought to help through our settlements with JPMorgan Chase, Citigroup, and now Bank of America, may see a significant tax bill just as they are beginning to see the light at the end of a dark financial tunnel.”

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