The Mortgage Forgiveness Debt Relief Act exempts people from paying taxes on certain types of mortgage loan debt that was canceled or forgiven by their lender as a result of a short sale, foreclosure, or principle reduction (loan modification) on their primary residences.
If the American Taxpayer Relief Act of 2012 hadn’t extended the Mortgage Debt Forgiveness Act of 2007, the IRS tax code normally requires a person to report and pay taxes (as if it is actual earned income) on debts that have been forgiven or cancelled. This is often referred to as ‘phantom income’.
For example ==> a person who owes $300,000 on a mortgage and short sales the home for $200,000, would have to pay about $25,000 or more in income tax on that $100,000 forgiven or cancelled debt. Ouch!
In 2011 alone, the Mortgage Debt Forgiveness Act saved borrowers more than $1 billion in taxes.
Do I Qualify for Mortgage Forgiveness Debt Relief?
If you have mortgage debt that was cancelled or forgiven, was used to purchase, build, improve a primary principle residence, or to refinance debt that that for one for these purposes, then you may be eligible.
Mortgage debt that was refinanced may be included, but only up to the balance prior to the refinance. So if you had a mortgage loan of $200,000 and took out $100,000 to buy an RV, go on vacation, or to use for any other reason, you may be out of luck….but check with your CPA.
The maximum amount you can treat as qualified principal residence indebtedness is $2 million, or $1 million if married filing
If you have forgiven or cancelled debt that does not qualify for exclusion as income, this debt may still qualify under the insolvency exclusion (check with your CPA or attorney).
Planning to Short Sale or Foreclose on Your Home?
Many people decide to short sale for foreclose on their home because they are upset all their friends and neighbors foreclosed 2-4 years ago and now are buying homes for half the price and have much lower mortgage payments, were denied a loan modification, or think they’re unable to refinance into much lower interest rate because their home is upside down in value.
Before you decide to do a strategic default walk away, foreclose, or short sale, and live in California, contact me and I will share with you how I decided to short sale my home and refer you to a short sale/foreclosure expert, real estate attorney, or CPA.
You should always consult with an real estate attorney or licensed CPA to discuss your specific scenario since I am not allowed to give specific legal or tax advice. If you want a referral to speak with a reputable attorney or CPA, just ask.
To find out if you are eligible to refinance your upside down home using the new HARP 2 refinance program or the soon coming HARP 3 refinance for those not eligible under HARP 2, call me direct (951) 215-6119 or contact me.
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