Wednesday, June 23, 2010
I have a lot of clients that are concerned of incurring tax liability upon a short sale or foreclosure. Luckily, there are few circumstances in which a taxpayer would actually be subject to 1099 income in the case of a foreclosure or short due to the 2007 Mortgage Debt Relief Act. Below is an outline of the Act and how it applies to you. For more information, consider contacting a Seattle Foreclosure Attorney.
The Mortgage Debt Relief Act and Debt Cancellation
As a general rule, the Mortgage Debt relief Act generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Additionally, debt reduced through mortgage modifications and principal reductions qualifies for this relief.
This provision applies to debt forgiven in calendar years 2007-1012 up to $ 2 Million.
Other exceptions to Cancellation of Debt 'COD' income:
1) Qualified principal residence indebtedness (same as outlined above)
2) Debts discharged in bankruptcy are not taxable income
3) If a taxpayer is insolvent (debts are more than the fair market value of total assets)
4) Non-recourse Loans – if a lender’s only remedy is to repossess property being financed (ie. The lender cannot pursue you personally in the case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in COD income. However, it may have other tax consequences.
Frequently asked questions:
Does the Mortgage Forgiveness Debt Relief apply to all cancelled debts?
No, the Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your primary residence, or to refinance debt incurred for those purposes. Additionally, the debt must be secured by the home.
Do I have to report forgiven debt on my tax return?
Yes, the amount of debt forgiven must be reported on FORM 982 and this form must be attached to your tax return.
Are losses on my home deductible as ‘Capital Losses’?
No. Losses from the sale or foreclosure of personal property are not deductible.
For more information on your rights in foreclosure or short sale, consider contacting a Seattle Foreclosure attorney.
Weitz Law Firm, PLLC
5400 Carillon Point, Building 5000
Kirkland, WA 98033
at 11:11 AM