Mortgage Forgiveness Debt Relief Act FAQs

January 18, 2009

faqs

Per the IRS, if you owe a debt to somone else and they cancel or forgive your debt, the cancelled amount may be taxable.

The Mortgage Forgiveness 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, debt forgiven, in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calender years 2007 – 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). This exclusion does not apply if the discharge is due to services performed by the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’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.

Disclaimer: This article is adapted from IRS.gov. We do not own this information. It is made available freely to the public. It is recommended that you consult a tax attorney or tax accountant for tax advice.

The following are the most frequently 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 to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed 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 canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example: You borrow $100,000 and default on the loan after paying back $20,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $80,000, which is generally 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 income involve:

  • Qualified principal residence: This is an exception created by the Mortgage Forgiveness 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 income 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 farming, and the loan 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 lenders 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 Dec. 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 relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all 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- 2012.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?

There is no dollar amount if the principal balance of the loan was less than $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 Form 982 to your tax return.

Where can I get this form?

You can download and save the form to your computer, use your tax-preparation software, or use your tax accountant.

How do I know 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?

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 actually required to include the forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilties 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 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 cancelled in a Title 11 bankruptcy case. An exclusion is also available for the cancellation of certain non-business 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 cancelled after my foreclosure, may I still exclude the cancelled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?

Yes, as long as the cancelled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossession, 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 cancelled debt must be included as income on your tax return.
  2. File Form 982 with your tax return.

How do I know if I was insolvent?

You are insolvent when you total debts exceed the fair market value of all your assets. Assets include everything you own (e.g. car, house, condo, furniture, life insurance policies, stocks and other investments, pension or 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 cancelled debt from income to the extent you were insolvent immediately before cancellation. You were insolvent to the extent that your total liabilities exceeded the fair market value of your assets immediately before the cancellation.

To claim this exclusion, you must attach Form 982 to your income tax return. Check box 1b on Form 982, and, on line 2, include the smaller of the amount of the debt cancelled 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.

Are there any publications I can read for more information?

Yes,

  1. Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues.
  2. See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov
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Mortgage Forgiveness Debt Relief Act Reduces Negative Tax Consequences

January 18, 2009

 Home Under Water

Per IRS new release IR-2008-17, homeowners whose mortgage debt was partly or entirely forgiven during calendar years 2007 – 2012 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their federal income tax return, according to the IRS.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions are available now on the IRS website.

 

“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.”

 

Legislation enacted in Oct. 2008 extended this relief through 2012. Thus this relief now applies to debt forgiven in calendar years 2007 – 2012. 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. 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).

 

We will post frequently asked questions (FAQs) on the Mortgage Forgiveness Debt Relief Act  in the next post….


Fannie Mae Extends Suspension of Foreclosure Sales

January 16, 2009

Foreclosure Sales

In an effort to provide mortgage servicers more time to implement the Streamlined Modification Program (SMP), Fannie Mae will extend the suspension of foreclosure sales and evictions until January 31, 2009. This initiative applies to loans owned or securitized by Fannie Mae.

During the extension, Fannie Mae hopes that attorneys and loan servicers contact borrowers and pursue workout options.

Last November, Fannie Mae announced the SMP and initiated this program on December 15, 2008. The SMP will target distressed homeowners who have missed three payments or more, who own and occupy their primary residence, and who have not filed for bankruptcy. The goal of the program is to keep homeowners in their houses through a combination of reducing the mortgage, interest rate, extending the life of the loan, and possibly even deferring payment on part of the principal –– all with the intention of providing the distressed homeowner with a lower monthly payment.

*This article is courtsey of Josh Cantwell from SREC’s Blog


Fannie Mae Promotes Short Sales

January 16, 2009

Short Sale Cloud

During the past month, we’ve heard of several ideas and seen several attempts to give some relief to distressed homeowners facing foreclosure. Here are a few: interest rates have been lowered, loan modifications are being proposed, foreclosure moratoriums have been suggested as has the use of bankruptcy courts to restructure loans.

Each approach offered by government and banking officials is flawed, but at least they’re finally looking at the problem.

This past December, Fannie Mae made a move when they put a moratorium on foreclosures through January 9th. Their reasoning was that they were installing a new computer system that would allow them to address the challenges of the current market much more efficiently . . . and they wanted time to come up with some ideas on how to handle all the foreclosures.

So what did they figure out? You got it! Fannie figured out that short sales present a very good way to get these properties moved fast. Fannie is now testing a program in Orlando and Phoenix whereby they will agree to a minimum price for which they would be willing to sell a house, rather than risk having it go to auction and sit on the market for months.

In essence, they want to do the short sale BEFORE there’s a buyer and then give the approved price to the real estate agent who then can market and sell the property.

Many real estate agents loath short sales because of the complex paperwork and the incredibly long response times it takes for lenders to respond to offers. Agents often lose their buyers because banks move too slow. Fannie Mae believes that any solution for today’s housing crisis will have to involve real estate agents, and to get this group on board, they’d need to take away obstacles that cause agents to run in the other direction.

It always looks good on paper doesn’t it?

If the reason agents aren’t doing short sales is because they’re complicated and take too long, then Fannie is going remove those obstacles and give the agent a number that they can successfully market. That way there’s no complicated paper work, and no guessing at what number the bank will finally approve.

But for Fannie to make this work, they need to overcome two challenges: 1) Working with homeowners to provide the information (short sale package) that is necessary to get the approval; and 2) A reliable way to determine market value.

In addressing the first concern, Fannie Mae could waive standard short sale package guidelines. Regardless, Fannie Mae is going to need to make the process as simple as can be on the front end so that homeowners can effectively begin the process. As for the second concern, who is going to make the decision on what each property can sell for, if the number is being determined BEFORE an agent gets involved?

Is it too far of a stretch to think of a 25 year-old in a cubicle looking at comparable properties for each case and ball-parking a number without understanding the market? Moreover, do you really think Fannie will be aggressive in discounting property before they know what the market will actually bear? And will it be enough of a discount to lure buyers?

Let’s use Los Angeles as an example. LA has seen value declines in middle class areas as much as 40% in 2008. In 2009, they are expecting a drop of 24% followed by a 6% drop in 2010.

Do you really think that Fannie will set minimums low enough to reflect what going on in the Los Angeles market?

I have my doubts.

Keep your fingers crossed for the next administration and hope that whatever they decide to do, it works.

*This article is adapted from SREC’s Blog


Twitter Me This, Twitter Me That

January 15, 2009

 

Have you ever heard of Twitter? If not I recommend you read this

I just thought about a way that you and I can keep in touch better. It’s by using Twitter. It doesn’t cost you a single penny, plus I’m even including a “quickstart” set-up link for you from Tony Hsieh, the CEO of Zappos… so you can get started in just a few minutes from now.
 
I am using Twitter to do all kinds of things like providing tips and tricks about house hunting, providing secret resources, helpful websites, recommendations, my opinions on random things and everything else in-between.
 
It’s a great way to send quick (only 140 characters) messages to each other. In fact, I think the best way to describe Twitter is like this.
 
Lauren’s quick definition of what Twitter is how it can benefit you?
Basically think of it like this. Suppose you had my cell phone number and you wanted to text me something really fast. You know…the same way you text your other friends right?
 
Well, when you just create a Twitter account and follow me (which is necessary in order to get the messages I send you)… We can see others text messages.
 
But… they are NOT called text messages on Twitter instead they are called “tweets”.
 
Does that make sense?
 
Steps (I want you to take right now) to Create a Twitter Account
  1. Go to: http://twitter.zappos.com/start
    Read the “quickstart” so you know exactly what to do and get it done fast.
  2. Come back here and go to: http://www.twitter.com
    Click on the “Join the Conversation” link and create a username and password
  3. Make sure you follow me by simply going to: http://twitter.com/laur2122 and click on “follow me”. This way you’ll get my tweets when I send them out to you.
  4. Send me a quick “hello” once you create your account

Twitter is a growing communication tool and trust me when I say you want to get familar with using it right now so you are ahead of the curve. If fact, you’ll probably going to see it being used to help market and sell houses (so create your account now).


New FHA Short Sale Guidelines for 2009

January 8, 2009

New FHA Guidelines make short sales easier than ever!

Short Sale Investors will be downright delirious to learn about changes to FHA laws set to begin in 2009. On December 24th, 2008 the Department of Housing and Urban Development (HUD) released “Mortgage Letter 2008-43“….despite the inconspicuous title, this is a powerful boon to every short sale investor in the nation.

For those of you who somehow managed not to be engrossed by this less than climatic title, here are the MAJOR changes coming soon to a FHA/HUD foreclosure near you!

  1. Elimination of the clause calling for 63 % or greater property appraisal vs. debt. Now properties can appraise at any value and still be eligible for the program.
  2. Increased Net. Instead of the former 82 % net based upon appraisal value the new limits will be 88 % if sold with 30 days, 86 % if sold within 60 days and 84 % thereafter.
  3. Increased Closing Costs on Short Sales. Although not a lot – FHA will now allow up to 1 % of closing costs rather than the former zero.
  4. Increased Seller Incentives. Again, although not a lot this will at least allow sellers a reasonable down payment toward a rental home by putting up to $1,000 in their pocket at closing.
  5. Increased Lien Allocations. Junior liens up to $2,500 are now allowed – just one more tool that helps sweeten the pot for short sale investors interested in pursuing FHA/HUD homes.
  6. Removal of Repair Limitations. This is one change that could potentially add up to thousands depending upon the required maintenance on the home. This opens the doors to many homes that would otherwise be ignored due to excessive damage.
  7. Exceptions to Non-Owner Occupant Requirements. This is on a case by case basis but opens to the door to rental properties formerly excluded from the program.

What Are Your Resolutions for 2009?

January 5, 2009

happy New Year

I want to take a moment to wish you a very safe, happy, healthy, and prosperous year in 2009!

 

Here is a list of the top 10 real estate investor’s resolutions for 2009:

 

1) I will clearly articulate what I want my real estate investing business to look like in one year and set concrete attainable goals to make it happen. (We can’t get where we’re going without a goal roadmap, so let’s chart it out)

 

2) I will follow those who have succeeded, emulate their successes
and learn from their mistakes. (It’s true. We all need mentors.)

 

3) I will stay focused on my core business and not get distracted by all the “next best things” (Just because an investment, opportunity, seminar, product, or book is exciting, informative, or hyped to the moon, doesn’t mean it is going to help in our specific business plans.  Let’s exercise some wisdom and maintain momentum staying focused)

 4) I will use the educational products and resources I have acquired before jumping onto anything else.   (Do we have unread books?  Let’s read them!  Unwatched trainings? Get watching. Unheard audio recordings. Pop them in your .mp3 player or listen using the Automobile University time when driving. Let’s apply what we ALREADY know this year, ok?)

 

5) I will prioritize networking relationships with others in the real estate arena, as it is people and not just technology or strategies that makes my business successful. (Let’s remember that the greatest successes are built on the greatest service to the greatest number…)

 

6) I will make every effort to attend at least one real estate investing seminar live event in 2009.  (This is a great place where we can forge lasting business relationships that add greatly to our bottom line)

 

7) I will wisely invest both time and money in my real estate business. (If we aren’t willing to make the necessary sacrifices, we probably aren’t going to achieve our goals. Time is the biggest equalizer we all have. I have the same time as you, as a pauper. The difference is what we do with it. And investing money in our real estate businesses can be vital – tools, technology, systems, education, marketing, office supplies, and more – all of these are vital)

 

8.) I will THINK BIG! I will THINK BIGGER! (The opportunity before us is limitless.  Let’s not be satisfied with small successes… let’s go for it!)

 

9) I will not give up! (Nothing happens without action.  We must never stop taking action. Take Massive action NOW!)

 

10) I will always “pay it forward”. (Let’s remember what it means to be a giver, in this season of giving. To sow a seed by helping others— and reap a harvest of better relationships, people served, and friendships made and renewed)

 

So what are your resolutions for 2009?

 

Let me know or post them below so I can help you achieve them and have it be the best year you have ever seen!

 

 

 

 


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