The Lowdown on Foreclosure & Short Sale Tax Issues
Depending on who you are, when someone
mentions IRS, it instills fear in most taxpayers. Here
is the my opinion on the whole forgiveness thing. Please
note that all of the info stated below is my personal
opinion on this subject. This is not legal or accounting
advice. You should talk to a competent legal or accounting
professional before making any decision.
You will have Forgiveness of Debt Tax
Liability whether you give the house back to the bank or do
a short sale. It's true! Before I first started doing
short sales, I thought that if the bank foreclosed on your
house, you wouldn't get a tax hit. However, I did think that
you would get a tax hit with a short sale. So why do a short
sale if you then have to pay taxes on the bank's loss?
Little did I know that you get hit with the tax liability
whether the bank forecloses or you do a short sale.
The government sees it as money you
received and never paid taxes on. If you lose a home thru
foreclosure, it goes back to the bank and the bank then
resells it. However, the amount of supposed debt being
supposedly "forgiven" will be much bigger. Why? Because the
bank will lose a lot more money. Take the case of a
homeowner that Countrywide turned down for a short sale. The
agent presented them an offer of $385,000, but they rejected
it. The bank thought they could get more money after
foreclosing on the house and then re-selling it.
However after foreclosing on the house,
the bank was only able to re-sell it for $230,000. This left
the homeowner's with over $210,000 in debt being forgiven.
If the bank had taken their original short sale offer, they
would have only had $35,000 in debt forgiven. That's a big
difference, right?
Now, here's the good news. The
Mortgage Forgiveness Debt Relief Act of 2007, changed all
that. Normally, when a lender
decides to forgive all or a portion of a borrower's debt and
accept less, the forgiven amount is considered as income for
the borrower and is liable to be taxed.
However, after the signing of the
Mortgage Forgiveness Debt Relief Act, amendments have been
made to remove such tax liability and allow the borrower and
lender to work freely together to find a common solution
that is beneficial to both parties. This protection is
limited to primary residences -- rental properties are
ineligible for relief -- so consult with a tax advisor. The
amount of forgiven mortgage debt allowed to be excluded from
income tax is limited to $2 million per year.
Here is one good
thing that comes out of this whole tax thing. It give you
lots of ammo to hold off the bank from collecting a
deficiency judgment from you.
If your bank files a 1099 for the lost income after you do a
short sale, then they cannot collect money from you after
that. And you can easily get rid of that tax liability by filing a Form 982 with your tax return.
I have attached several of the things I
researched to get this info. View them below.
If you have any specific questions or
need help, please give me a call. Remember I'm here to help
you in any way that I can.
Sincerely,
Chris Curry
(386) 719-2330
The
Mortgage Forgiveness Debt Relief Act and Debt Cancellation
Here's the link this was copied from:
http://www.irs.gov/individuals/article/0,,id=179414,00.html
If you owe a debt to someone else and
they cancel or forgive that debt, the canceled amount may be
taxable.
The Mortgage Debt Relief Act of 2007
generally allows taxpayers to exclude income from the
discharge of debt on their principal residence. Debt reduced
through mortgage restructuring, as well as mortgage debt
forgiven in connection with a foreclosure, qualifies for the
relief.
This provision applies to debt forgiven
in calendar years 2007 through 2012. Up to $2 million of
forgiven debt is eligible for this exclusion ($1 million if
married filing separately). The exclusion does not apply if
the discharge is due to services performed for the lender or
any other reason not directly related to a decline in the
home's value or the taxpayers's financial condition.
More information, including detailed
examples can be found in Publication 4681, Canceled Debts,
Foreclosures, Repossessions, and Abandonments. Also see IRS
news release IR-2008-17.
The following are the most commonly asked
questions and answers about The Mortgage Forgiveness Debt
Relief Act and debt cancellation:
What is
Cancellation of Debt? If you
borrow money from a commercial lender and the lender later
cancels or forgives the debt, you may have to include the
cancelled amount in income for tax purposes, depending on
the circumstances. When you borrowed the money you were not
required to include the loan proceeds in income because you
had an obligation to repay the lender. When that obligation
is subsequently forgiven, the amount you received as loan
proceeds is normally reportable as income because you no
longer have an obligation to repay the lender. The lender is
usually required to report the amount of the canceled debt
to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here is a very simplified example. You
borrow $10,000 and default on the loan after paying back
$2,000. If the lender is unable to collect the remaining
debt from you, there is a cancellation of debt of $8,000,
which generally is taxable income to you.
Is Cancellation
of Debt income always taxable?
Not always. There are some exceptions. The most common
situations when cancellation of debt income is not taxable
involve:
Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
Certain farm debts:
If you incurred the debt directly in operation of a farm,
more than half your income from the prior three years was
from farming, and the loan was owed to a person or agency
regularly engaged in lending, your cancelled debt is
generally not considered taxable income.
Non-recourse loans: A
non-recourse loan is a loan for which the lende's only
remedy in case of default is to repossess the property being
financed or used as collateral. That is, the lender cannot
pursue you personally in case of default. Forgiveness of a
non-recourse loan resulting from a foreclosure does not
result in cancellation of debt income. However, it may
result in other tax consequences.
These exceptions are discussed in detail
in Publication 4681.
What is the
Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted
on December 20, 2007 (see News Release IR-2008-17).
Generally, the Act allows exclusion of income realized as a
result of modification of the terms of the mortgage, or
foreclosure on your principal residence.
What does
exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender
must be included as income on your tax return and is
taxable. But the Mortgage Forgiveness Debt Relief Act allows
you to exclude certain cancelled debt on your principal
residence from income. Debt reduced through mortgage
restructuring, as well as mortgage debt forgiven in
connection with a foreclosure, qualifies for the relief.
Does the Mortgage
Forgiveness Debt Relief Act apply to all forgiven or
cancelled debts? No. The Act
applies only to forgiven or cancelled debt used to buy,
build or substantially improve your principal residence, or
to refinance debt incurred for those purposes. In addition,
the debt must be secured by the home. This is known as
qualified principal residence indebtedness. The maximum
amount you can treat as qualified principal residence
indebtedness is $2 million or $1 million if married filing
Does the Mortgage Forgiveness Debt Relief
Act apply to debt incurred to refinance a home? Debt used to
refinance your home qualifies for this exclusion, but only
to the extent that the principal balance of the old
mortgage, immediately before the refinancing, would have
qualified. For more information, including an example, see
Publication 4681.
How long is this
special relief in effect? It
applies to qualified principal residence indebtedness
forgiven in calendar years 2007 through 2012.
Is there a limit
on the amount of forgiven qualified principal residence
indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal
residence indebtedness is $2 million ($1 million if married
filing separately for the tax year), at the time the loan
was forgiven. If the balance was greater, see the
instructions to Form 982 and the detailed example in
Publication 4681.
If the forgiven debt is excluded from
income, do I have to report it on my tax return? Yes. The
amount of debt forgiven must be reported on Form 982 and
this form must be attached to your tax return.
Do I have to
complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge
of Indebtedness (and Section 1082 Adjustment), is used for
other purposes in addition to reporting the exclusion of
forgiveness of qualified principal residence indebtedness.
If you are using the form only to report the exclusion of
forgiveness of qualified principal residence indebtedness as
the result of foreclosure on your principal residence, you
only need to complete lines 1e and 2. If you kept ownership
of your home and modification of the terms of your mortgage
resulted in the forgiveness of qualified principal residence
indebtedness, complete lines 1e, 2, and 10b. Attach the Form
982 to your tax return.
Where can I get
this form? If you use a
computer to fill out your return, check your tax-preparation
software. You can also download the form at IRS.gov, or call
1-800-829-3676. If you call to order, please allow 7-10 days
for delivery.
How do I know or
find out how much debt was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt,
by February 2, 2009. The amount of debt forgiven or
cancelled will be shown in box 2. If this debt is all
qualified principal residence indebtedness, the amount shown
in box 2 will generally be the amount that you enter on
lines 2 and 10b, if applicable, on Form 982.
Can I exclude debt forgiven on my second
home, credit card or car loans?
Not under this provision. Only cancelled
debt used to buy, build or improve your principal residence
or refinance debt incurred for those purposes qualifies for
this exclusion. See Publication 4681 for further details.
If part of the
forgiven debt doesn't qualify for exclusion from income
under this provision, is it possible that it may qualify for
exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency
exclusion. Normally, you are not required to include
forgiven debts in income to the extent that you are
insolvent. You are insolvent when your total
liabilities exceed your total assets. The forgiven debt may
also qualify for exclusion if the debt was discharged in a
Title 11 bankruptcy proceeding or if the debt is qualified
farm indebtedness or qualified real property business
indebtedness. If you believe you qualify for any of these
exceptions, see the instructions for Form 982. Publication
4681 discusses each of these exceptions and includes
examples.
I lost money on
the foreclosure of my home.
Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal
property are not deductible.
If I sold my home
at a loss and the remaining loan is forgiven, does this
constitute a cancellation of debt?
Yes. To the extent that a loan from a lender is not fully
satisfied and a lender cancels the unsatisfied debt, you
have cancellation of indebtedness income. If the amount
forgiven or canceled is $600 or more, the lender must
generally issue Form 1099-C, Cancellation of Debt, showing
the amount of debt canceled. However, you may be able to
exclude part or all of this income if the debt was qualified
principal residence indebtedness, you were insolvent
immediately before the discharge, or if the debt was
canceled in a title 11 bankruptcy case. An exclusion
is also available for the cancellation of certain
nonbusiness debts of a qualified individual as a result of a
disaster in a Midwestern disaster area. See Form 982
for details.
If the remaining
balance owed on my mortgage loan that I was personally
liable for was canceled after my foreclosure, may I still
exclude the canceled debt from income under the qualified
principal residence exclusion, even though I no longer own
my residence? Yes, as long as
the canceled debt was qualified principal residence
indebtedness. See Example 2 on page 13 of Publication 4681,
Canceled Debts, Foreclosures, Repossessions, and
Abandonments.
Will I receive
notification of cancellation of debt from my lender?
Yes. Lenders are required to send Form
1099-C, Cancellation of Debt, when they cancel any debt of
$600 or more. The amount cancelled will be in box 2 of the
form.
What if I
disagree with the amount in box 2?
Contact your lender to work out any discrepancies and have
the lender issue a corrected Form 1099-C.
How do I report the forgiveness of debt
that is excluded from gross income?
(1) Check the appropriate box under line
1 on Form 982, Reduction of Tax Attributes Due to Discharge
of Indebtedness (and Section 1082 Basis Adjustment) to
indicate the type of discharge of indebtedness and enter the
amount of the discharged debt excluded from gross income on
line 2. Any remaining canceled debt must be included
as income on your tax return.
(2) File Form 982 with your tax return.
My student loan
was cancelled; will this result in taxable income?
In some cases, yes. Your student loan cancellation will not
result in taxable income if you agreed to a loan provision
requiring you to work in a certain profession for a
specified period of time, nd you fulfilled this obligation.
Are there other conditions I should know
about to exclude the cancellation of student debt?
Yes, your student loan must have been
made by:
(a) the federal government, or a state or
local government or subdivision;
(b) a tax-exempt public benefit
corporation which has control of a state, county or
municipal hospital where the employees are considered public
employees; or
(c) a school which has a program to
encourage students to work in underserved occupations or
areas, and has an agreement with one of the above to fund
the program, under the direction of a governmental unit or a
charitable or educational organization.
Can I exclude
cancellation of credit card debt?
In some cases, yes. Nonbusiness credit card debt
cancellation can be excluded from income if the cancellation
occurred in a title 11 bankruptcy case, or to the extent you
were insolvent just before the cancellation. See the
examples in Publication 4681.
How do I know if
I was insolvent? You are
insolvent when your total debts exceed the total fair market
value of all of your assets. Assets include everything
you own, e.g., your car, house, condominium, furniture, life
insurance policies, stocks, other investments, or your
pension and other retirement accounts.
How should I report the information and
items needed to prove insolvency?
Use Form 982, Reduction of Tax Attributes
Due to Discharge of Indebtedness (and Section 1082 Basis
Adjustment) to exclude canceled debt from income to the
extent you were insolvent immediately before the
cancellation. You were insolvent to the extent that
your liabilities exceeded the fair market value of your
assets immediately before the cancellation.
To claim this exclusion, you must attach
Form 982 to your federal income tax return. Check box
1b on Form 982, and, on line 2, include the smaller of the
amount of the debt canceled or the amount by which you were
insolvent immediately prior to the cancellation. You
must also reduce your tax attributes in Part II of Form 982.
My car was
repossessed and I received a 1099-C; can I exclude this
amount on my tax return? Only
if the cancellation happened in a title 11 bankruptcy case,
or to the extent you were insolvent just before the
cancellation. See Publication 4681 for examples.
Mortgage Workouts, Now Tax-Free for Many
Homeowners; Claim Relief on Newly-Revised IRS Form
Updated with FAQs at bottom
Feb. 28, 2008
Updated with new link Dec.
11, 2008
IR-2008-17, Feb. 12, 2008
Here's the link
this was copied from:
http://www.irs.gov/irs/article/0,,id=179073,00.html
WASHINGTON - Homeowners whose mortgage
debt was partly or entirely forgiven during 2007 may be able
to claim special tax relief by filling out newly-revised
Form 982 and attaching it to their 2007 federal income tax
return, according to the Internal Revenue Service.
Normally, debt forgiveness results in
taxable income. But under the Mortgage Forgiveness Debt
Relief Act of 2007, enacted Dec. 20, taxpayers may exclude
debt forgiven on their principal residence if the balance of
their loan was $2 million or less. The limit is $1 million
for a married person filing a separate return. Details are
on Form 982 and its instructions, available now on this Web
site.
The new law contains important provisions for struggling homeowners, said Acting IRS Commissioner Linda Stiff. We urge people with mortgage problems to take full advantage of the valuable tax relief available.
The late-December enactment means that
reporting procedures for this law change were not
incorporated into tax-preparation software or IRS forms. For
that reason, people using tax software should check with
their provider for updates that include the revised Form
982. Similarly, the IRS is now updating its systems and
expects to begin accepting electronically-filed returns that
include Form 982 by March 3. The paper Form 982 is now being
accepted, but the IRS reminds affected taxpayers to consider
filing electronically, which greatly reduces errors and
speeds refunds.
The new law applies to debt forgiven in
2007, 2008 or 2009. Debt reduced through mortgage
restructuring, as well as mortgage debt forgiven in
connection with a foreclosure, may qualify for this relief.
In most cases, eligible homeowners only need to fill out a
few lines on Form 982 (specifically, lines 1e, 2 and 10b).
The debt must have been used to buy,
build or substantially improve the taxpayer's principal
residence and must have been secured by that residence. Debt
used to refinance qualifying debt is also eligible for the
exclusion, but only up to the amount of the old mortgage
principal, just before the refinancing.
Debt forgiven on second homes, rental
property, business property, credit cards or car loans does
not qualify for the new tax-relief provision. In some cases,
however, other kinds of tax relief, based on insolvency, for
example, may be available. See Form 982 for details.
Borrowers whose debt is reduced or
eliminated receive a year-end statement (Form 1099-C) from
their lender. For debt cancelled in 2007, the lender was
required to provide this form to the borrower by Jan. 31,
2008. By law, this form must show the amount of debt
forgiven and the fair market value of any property given up
through foreclosure.
The IRS urges borrowers to check the Form
1099-C carefully. Notify the lender immediately if any of
the information shown is incorrect. Borrowers should pay
particular attention to the amount of debt forgiven (Box 2)
and the value listed for their home ( Box 7).
Note: Legislation enacted in October 2008
extended this relief through 2012. Thus this relief now
applies to debt forgiven in calendar years 2007 through
2012.
Links to reference:
The actual law passed by congress. Please
note that there is a lot of legalese and it is hard to
understand. I went to the IRS's website to decipher it all.
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h3648enr.txt.pdf
IRS Form 982:
http://www.irs.gov/pub/irs-pdf/f982.pdf
