The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation: "The Mortgage Forgiveness Debt Relief Act and Debt Cancellation


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 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.

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’s 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 lender’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
separately.

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, and 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.

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."

High end Real Estate still showing signs of weakness

Seeking Real Estate Bargains? Try High-End Homes - WSJ.com

Falling real estate prices are becoming as much a feature of high-end neighborhoods as ocean views, infinity pools and four-car garages.

While the latest data suggests prices for mainstream homes may be stabilizing after several years of pain, the news for luxury homes isn't looking as good.

That's bad news for sellers, naturally, but anyone in the market for a home listed for $2 million or more will find deeply discounted asking prices—and may be able to command even lower prices.

On Tuesday, data from the Federal Housing Finance Agency showed that average home prices ticked up 0.3% nationwide between June and July, including a 1.6% bounce on the west coast. The gains are modest, and they are partly influenced by the season—higher-end homes tend to sell better in late spring and early summer, as families try to move before the school year. Analysts are disappointed the rise was not higher.

Those who lose homes may face state tax hit

Those who lose homes may face state tax hit: "The state-tax hit could be substantial and the rules are complex. People in mortgage trouble should consult a qualified tax professional.

Normally, when a lender forgives debt, the forgiven amount is taxed as income.

One exception is nonrecourse debt. On nonrecourse debt, if a borrower defaults, the lender can seize the collateral but can't go after the borrower's other assets. Forgiveness of a nonrecourse mortgage generally does not result in tax on canceled debt income.

A mortgage used to buy a home is usually nonrecourse. But if the borrower refinances the loan and takes cash out, or takes out a home equity loan or line of credit, that debt usually is recourse debt. Canceled recourse debt is subject to income tax.

Exceptions to the tax also apply if the borrower is bankrupt or insolvent."
-------------------------------
"People are starting to notice that California taxes may be significant."

Attorney General says Foreclosure Consultants must register

Note the California Association of Realtors states that Realtors are acting as foreclosure consultants when they contact the lender on behalf of upside down homeowners.

Note 2: California Attorneys are not Foreclosure consultants when they render service as part of their Attorney practice. 

 

Consumers - Foreclosure Consultant Registration - California Dept. of Justice - Office of the Attorney General

After July 1, 2009, with certain limited exceptions, it is illegal to operate as a mortgage foreclosure consultant in California unless the foreclosure consultant has obtained from the Department of Justice a Certificate of Registration as a Mortgage Foreclosure Consultant. In order to obtain the Certificate of Registration required by California Civil Code section 2945.45, a foreclosure consultant must complete the application and provide all required documents to the Department of Justice.

If you are a foreclosure consultant, to be certain that you obtain your Certificate of Registration by July 1, you should submit your application no later than June 15, 2009. Be certain to submit with your application, a copy of the contract you will use with clients and all of the other documents required by the application form. You should send this information along with your check for the $850 filing fee made payable to the “California Attorney General’s Office” to:

Foreclosure Consultant Registration Program California Attorney General's Office Consumer Law Section 300 South Spring Street, Suite 1702 Los Angeles, CA 90013

Before a Certificate of Registration can be obtained, it will be necessary for you to obtain a bond in the amount of $100,000, and to file a copy of the bond with the Secretary of State. The Certificate of Registration will not be issued until the Secretary of State acknowledges that the bond has been properly filed. Please contact the Secretary of State to obtain the necessary bond forms at the address below:

Secretary of State Special Filings Unit 1500 11th Street Sacramento, CA 95814

You can also contact the Secretary of State’s Office via the web at: http://www.sos.ca.gov/business/sf/

If you would rather make a $100,000 deposit in lieu of obtaining the bond, you should contact us at the above address for the Attorney General’s Office and we will provide you with the form.

Your application will not be processed until the completed application form, all required documents, and the $850 fee have been received, and the Secretary of State has acknowledged receipt of the bond, or you have made the necessary $100,000 deposit in lieu of the bond.

After a Certificate of Registration is issued to you, you must inform us each time there is a material change in any of the information or documents you supplied with your initial application. Failure to do so can result in the revocation of your Certificate of Registration.

You can obtain a copy of the application form PDF logo [PDF 304 kb / 5 pg] to register as a Mortgage Foreclosure Consultant, and can read a copy of the law to learn important information about additional requirements of the Mortgage Foreclosure Consultant Law. PDF logo [PDF 94 kb / 12 pg]

* Application Form PDF logo [PDF 304 kb / 5 pg]

* Mortgage Foreclosure Consultant Law PDF logo [PDF 94 kb / 12 pg]

Short sale specialists

REALTOR® Magazine-Daily News-Specialists Offer Short-Sale Help

Specialists Offer Short-Sale Help
Short sales now account for the majority of some real estate agents' transactions. To ensure they have plenty of time to list and show properties, many of these agents are working with short-sale negotiators, who spend much of their time on the phone negotiating with lenders on behalf of sellers.

The short-sale process can take six months or more, as the presence of second loans, increased consolidation among lenders, and the large number of short-sale transactions make it more challenging.

Gmail - Common Ways to Hold Title - jmcconnin@gmail.com

Ways to hold title under California Law.

Many people ask if they should change the names on title when when they are facing a foreclosure or a short sale.

The answer is it depends on what you are trying to accomplish and if by doing so you might give the bank a piece of evidence it might need to argue you should not be protected by California's anti deficiency protections.

Additionally, changing the name on title may not accomplish your goals.

It may protect credit if done in time, it is unlikely to change responsibility for the loan balances.

You should definitely speak with an attorney before you change title.
(beware of foreclosure consultants suggesting you put title in someone else's name.


Gmail - Common Ways to Hold Title - jmcconnin@gmail.com


for more on short sales and foreclosure law.

short sales and foreclosures buyers may be slowing down

We noticed a massive increase in interest in a our san diego short sale listings when interest rates dropped.  Now that they are rising again we see that mortgage applications hit a new 8 month law. 

We new buyers were payment sensitive but not this much. 

This should be a note for the administration and the Fed.  If inflation gets out of control and rates increase real estate prices may start falling again. 

REALTOR® Magazine-Daily News-Mortgage Applications Hit 8-Month Low

Mortgage Applications Hit 8-Month Low
Mortgage applications declined 18.9 last week compared to the previous week, hitting the lowest level since Nov. 21, 2008, according to the index compiled weekly by the Mortgage Bankers Association.

Application volume decreased from 548.2 the previous week to 444.8 last week on an adjusted basis. On an unadjusted basis, the index declined 18.5 percent and was down 7.4 percent compared with the same week a year ago.

The decline was driven by refinances, which fell 30 percent compared to the previous week. The purchase index was down 4.5 percent.

short sale strategy