Not so much a question as looking for a logical tax code explanation. Over the past few years, I've prepared a number of returns in which the taxpayer did a short sale of their primary residence, had all their debt forgiven, and then were able to further benefit by a Schedule A tax deduction for the mortgage interest and prop taxes that were reported on the bank issued Form 1098 even though the taxpayer had no out of their pocket payments for same. I have trouble accepting this and don't understand why the IRS allows a taxpayer who overpaid and over borrowed for a house they couldn't afford (and shouldn't have bought) to not only have their debt absolved, but then further benefit by deducting $50,000 of mortgage interest and $8,000 of property taxes. I'm referring to taxpayers with gross income of $160,000 or more who end up with refunds of $15,000 to $20,000 because of the 1098 reporting. Does this make sense after having all of their 1099-C debt excluded because of the residential or insolvency exception rules.
Do have a question after all. Does it matter if the house was purchased in 2005? My understanding that debt had to be incurred after 2006? And what if debt was originally incurred in 2005 but refinanced to larger amount in 2007. Still qualifies for 100% exclusion for residential debt or insolvency?
Do have a question after all. Does it matter if the house was purchased in 2005? My understanding that debt had to be incurred after 2006? And what if debt was originally incurred in 2005 but refinanced to larger amount in 2007. Still qualifies for 100% exclusion for residential debt or insolvency?