Important tax time news

Tax season is here and that’s usually not good news. But, the good news is that tax relief may also be in sight for many struggling homeowners thanks to the Mortgage Debt Relief Act of 2007. As we have written about in the past, this Act -- which was recently extended until the end of 2013 -- allows homeowners to avoid paying income taxes on some mortgage debt that gets forgiven through foreclosures, deeds-in-lieu of foreclosure, short sales or loan modifications.

If you owe a debt (such as a mortgage loan) and the lender cancels or forgives part of that debt, the discharged amount (which you no longer owe) may be taxable according to the IRS. Under the Internal Revenue Code, all types of forgiven debt are still treated as income and subject to taxes.

The Mortgage Debt Relief Act may apply to:

• Homeowners who are granted principal forgiveness on their mortgage loan (loan modification)
• Homeowners who do a deed-in-lieu of foreclosure on their home
• Homeowners who have lost their home to foreclosure
• Homeowners who do a short sale on their home

A short sale is an alternative to foreclosure wherein the home is sold for less than the balance remaining on the mortgage loan. The lender agrees to accept less than the amount owed on the mortgage loan, and the borrower typically receives no money from the sale…but we have successfully negotiated ‘incentives’ paid to our seller-clients in excess of $30,000 when doing a short sale. If the mortgage lender decides to forgive the deficiency balance (resulting from the ‘short’ sale of the property) as part of the negotiated agreement, the IRS still generally considers the forgiven amount as part of your income that is subject to tax. The Mortgage Debt Relief Act permits taxpayers to exclude the amount of forgiven debt from their taxable income.

In order for the Mortgage Debt Relief Act tax break to apply, the forgiven debt must be discharged from a homeowner's loan on a principal residence. Additionally, there is a limit of $2 million in forgiven debt for couples who are married and file jointly, and a $1 million debt forgiveness limit for single filers or people who are married, filing separately. Finally, the debt has to be forgiven based on the homeowner's financial situation or a drop in the home's value.

If you are looking for mortgage forgiveness, you now have less than 11 months to take advantage of this tax relief. And while it may seem like you have a lot of time between now and December, keep in mind that short sales can take up to 6 months (or more) to complete.

To claim the mortgage forgiveness tax break, use IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness, and Section 1082 Basis Adjustment). On this form you will report the amount of mortgage debt that was forgiven, and keep in mind that you will only fill out a portion of the form. After the appropriate lines are completed, attach the Form 982 to your income tax return. And, as always, we strongly suggest you consult with a qualified tax professional regarding this subject.

For more information about mortgage forgiveness and the 2007 Mortgage Debt Relief Act, please refer to the following documents:

• IRS News Release IR-2008-17
• IRS Publication 4681 (Cancelled Debts, Foreclosures, Repossessions, and Abandonments)

 

If you have any questions about short selling your home…please call me directly at 561.602.1258

As always…thanks for reading.

Steve Jackson