Up Date-Mortgage Workouts Now Tax-Free for Many Homeowners
Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20
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 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, available now on the IRS Web site.
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 IRS 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.
Notes:
1. A Forbearance Agreement with your mortgage company that contains terms under which you are able to keep your home by remaining current on your mortgage and repaying the delinquent amount over time or on the backend.
2. A Loan Modification that adjusts the terms of your loan to make the payments more manageable for you (lower the interest rate).
3. A Short Sale in which your lender approves a discounted payoff of all existing mortgages. In simpler terms, the lenders accept the proceeds generated by a market sale of the property as the payoff amount on the outstanding loans. Short Sales are frequently approved and escrows closed with no out-of-pocket costs paid by the seller.
