Mortgage Forgiveness Debt Relief Act of 2007

[S T]

I have a question on this, as it involves one of my current taxpayers.

As I understand this, the original amount of the mortgage for acquisition debt can be relieved, but if the t/p refinanced and acquired equity to pay off other credit card debt, that portion can not be relieved. Is this correct?

When calculating the amount of forgiven debt that is covered by this statutory exclusion, any debt not used to buy or improve the principal residence will continue to be considered as income to the foreclosed homeowner. This means that a careful analysis of the loan history and actual expenditures made by a debtor must be made before a foreclosure is permitted. Unfortunately, a byproduct of this legislation could well be a false sense of security for a homeowner facing foreclosure. The failure to act promptly could result in the unfortunate gut punch described above with tax liability on top of loss of the home.

So in this taxpayers case, and example:

Mortgage acquisition was $138,000, refinance in 2007 was $201,000, which is $63,000 equity and payoff credit cards and other loan debt.

If I understand this correctly, then the t/p would have to pay taxes on the $63,000 as none of that can be allocated to acquistion or improvement of the principal residence.

Would the insolvency form 982 still be available for the $63,000?

Current, today market facts would be that the property is worth FMV real estate value at approximately $125,000. Then 13,000 would be forgiven under mortgage relief, however, the $63,000 would be taxalbe. Would this amount be taxable as ordinary or capital gain? I am thinking ordinary, unless the t/p can use the form 982.

Thanks in advance for your thoughts and wisdom.

Sandy

[Bees Knees]

TTB 2008 tax year, page 14-10 says:

The exclusion for discharge of debt due to insolvency does not
apply if the exclusion for discharge of debt on a qualified principal
residence applies, unless the taxpayer elects to apply the
insolvency exclusion instead.

To me, that says you can use one or the other, but not a combination of both to exclude gain.

Any cancelled debt that is taxable is reported on line 21 of the 1040 as ordinary income, unless it is business cancelled debt reported on Schedule C or F.

[Jesse]

I have a question on this, as it involves one of my current taxpayers.

As I understand this, the original amount of the mortgage for acquisition debt can be relieved, but if the t/p refinanced and acquired equity to pay off other credit card debt, that portion can not be relieved. Is this correct?

Sandy

I would say that is correct.

Was the debt reduced or did the bank receive the home in foreclosure or abandonment?

[S T]

Question

The t/p is asking the "what ifs" in case they decide to let the property go to foreclosure or possibly transact a short sale.

Thanks for the info.

Sandy

[erchess]

huh?

Who would buy a house from someone who admitted that it was not their house?

[JG EA]

Sandy, how much insolvency is there? If enough just do that and forget the mortgage forgiveness.
I have this same situation with a client whose home was refinanced and refinanced. OK on the sale part of it all but not on debt forgiveness. I've given her pages to record assets and liabilities before the debt forgiveness in hopes that it will be enough.

And yes ordinary income if taxable.

By the way the what if's are impossible without hard numbers, there are too many factors (at least for me). I tried but changed my mind. I didn't get into any of that until she gives me the actual numbers. The bank gave here a lower amount they were going to forgive than we though, but just verbal. We'll probably have to wait until the forms - she is having a hard time dealing with it all.

Have you checked out Pub 4681? They have worksheets and good examples.

[S T]

So we have two options

The old way with regular insolvency on foreclosure or short sale like we have used in the past before the Mortgage Relief bill?

No gain for sure, she owes more than the value of the property by about $75,000 or so due to the refinances.

That would be great it I can use the old way!

do IRA/401K accounts count in the calculation as assets? Been a while since I have had to do one of these.

I will provide the t/p with an asset/liability sheet to start to work on and check on pub 4681.

I agree the preliminaries/projections are somewhat disagreeable for me as well, as we really don't know the figures based on the mortgage companies and the real estate market, but this t/p is doing some early retirement planning for next 4/09, so I am trying to paint the worse case scenario for her, just in case!

Thanks JG

Sandy

[JG EA]

You're welcome.
Sure you can use the old way. (But I don't understand short sales.)

But sure you can do just the insolvency. Be sure and reduce her assets by the amount of the insolvency. In my case it just means all her clothes will have zero value. So if she has a yard sale it'll all be taxable. Not a big deal for sure. It was one of those cases where the ex did her wrong. I'm hoping at least her taxes will be good.

[Gretel]

Yes, I think retirement accounts count as assets.

[joanmcq]

yes, they do.

[AZ-Tax]

Must the borrower be in foreclosure to qualify for the

Mortgage Forgiveness Debt Relief Act of 2007? When the borrower does a Short Sale on his residence home, is the borrower forclosing?

[solomon]

Mortgage Forgiveness Debt Relief Act of 2007? When the borrower does a Short Sale on his residence home, is the borrower forclosing?

No. Nevertheless, for the tax return , it in effect is treated like one. Ostensibly it does not affect credit as much as an outright abandonment and foreclosure. Normally it is not done without the lender's participation.

[taxmom34]

short sale?

i don't know anything about short sales, but my nephew 2 years ago gave up his home to the bank and told me it was being considered a short sale. then, last year he bought another house? how can the bank do that? how could he be approved for another mortgage when he defaulted on the last one and just a year ago. maybe if i understood what a short sale was i could understand the bank's position