MORTGAGE DEBT CANCELLATION RELIEF
Posted by executivelounge on February 13, 2008
Not many people are aware about the new law regarding forgiveness of discharged debt due to a short sale. Take a look at the article below for details:
H.R. 3648 – Public Law 110-142
Signed December 20, 2007
Summary: Generally, individuals who are relieved of their obligation to pay some portion of a mortgage debt on a principal residence between January 1, 2007 and December 31, 2009 will not be required to pay income tax on any amount that is forgiven.
Background: A fundamental principle of the income tax is that a taxpayer must recognize income and pay tax any time a debt of the taxpayer is forgiven or discharged. Exceptions are provided in several circumstances, including bankruptcy, insolvency (as defined by state law) and for some investment real estate. Until this new rule was enacted, however, no exception applied to any amount debt forgiven on a mortgage for a taxpayer’s principal residence. Thus, until now, when some portion of a mortgage debt was forgiven, that amount has been treated as taxable income and the borrower has been taxed at ordinary income rates on the forgiven amount, even though there is no cash.
The newly-enacted relief for mortgage debt forgiveness is Congress’s response to the problems generated by the subprime crisis, short sales, rising foreclosure rates and price corrections in some markets. Thus, when a lender forgives some ortion of a borrower’s mortgage debt in a short sale, a foreclosure, a workout with the lender or some similar circumstance, the borrower will not be required to recognize income or pay tax on the forgiven amount. This relief applies to debts forgiven between January 1, 2007 and December 31, 2009.
Provisions:
• No income limitation: All borrowers receive the relief, no matter what their income.
• Dollar limitation: No more than $2 million of mortgage debt is eligible for the exclusion ($1 million of debt for a married filing separately return).
• Relief applies only to an individual’s principal residence.
• The forgiven mortgage debt must have been secured by that residence.
• No relief is available for cash-outs, whether the cash-out takes the form of a refinanced first mortgage, a second mortgage, home equity line of credit or similar arrangement.
• Eligible debt is what is called “acquisition indebtedness.” This is debt used to acquire, construct or rehabilitate a residence.
• Refinanced debt qualifies, so long as the debt does not exceed the original amount of the debt. (Same rule as Mortgage Interest Deduction)
• Home equity debt (or second mortgages) qualifies if the funds were used to improve the home. (Borrower must have adequate records, as under current law.)
• See cash-outs, above. No amount of a cash out may be treated as acquisition debt.
yep said
The Socialist Congress and the Bushtard have found another way to transfer wealth from bank depositors to borrowing dead beats. There is now NO incentive for the deadbeats to continue making payments on their borrowed capital. They’ll walk and use their brother-in-law’s credit to rebuy the same house at reduced price. Had the BUSHTARD wanted to save the housing and banking industry the law would have INCREASED the tax on DEBT CANCELATION INCOME.