Thursday, November 20, 2008

Mortgage Foreclosure Debt Relief

Today’s Home Owners are facing a lot of stress due to changing market conditions that are forcing foreclosure or a short sale of their home..
As the government takes action to stabilize the housing market, homeowners must understand the potential tax implications and new rules regarding these often once in a lifetime transactions.
“It’s hard to believe, but prior to December of 2007, if a homeowner lost his house due to a bank foreclosure, and the bank forgave any difference between the price it was sold for and what was owed, the homeowner would owe additional income tax on that portion,” said Chris Kaucnik, Director of Marketing for HWA.
Michael J. Greenen, CPA and Certified Financial Planner offers an example, “Let’s say the homeowner owed $300,000 on the mortgage, but the foreclosure sale only brought in $200,000. Then the bank forgave the $100,000 shortfall, called cancellation of debt. The homeowner would have been liable for the income tax on the $100,000 debt forgiveness from the bank.”
“Now, because of the unique stresses in the housing industry lately and on our whole economy, last December Congress stepped in to provide temporary relief in the form of forgiving this debt, but only for the 2007, 2008 and 2009 tax years. After that, the old rule applies again,” adds Greenen.
There are conditions that apply to this tax relief:
– To be eligible, the mortgage must be for the principal residence, not vacation, investment or other properties.
– No more than $2,000,000 of forgiven debt can be excluded from taxable income.
– When part of the debt is from a home equity loan, it cannot have been used for purposes other than to build, buy or substantially improve the property otherwise that portion used for other purposes is still taxable.
– When a short sale occurs*, the portion of the mortgage the bank may forgive, including any commission expenses and other selling costs are taxable other than for 2007, 2008 and 2009.
– When the lender agrees to reduce a mortgage payment for a homeowner to keep them in their home, the amount it is reduced by is taxable other than for these relief years.**
– This Act also extended mortgage insurance as an itemized deduction through 2010 on mortgage contracts entered into between 12/31/06 and 1/1/11.
* A short sale is when a borrower is behind on the mortgage payments and the lender agrees the house can be sold for less than what is owed on the mortgage. But all proceeds must be turned over to the bank.
** This does effect eventual capital gain exclusions when the homeowner decides to sell the home. Consult with a professional tax accountant or attorney for advice and information as soon as possible.

Information provided from HWA.

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