Mortgage Debt Forgiveness

Mortgage Debt ForgivenessMortgage Debt Forgiveness

Mortgage debt forgiveness and its tax consequences are explained in the IRS publication at the bottom of this page .  It explains key elements of the Mortgage Forgiveness Debt Relief Act of 2007 which expired December 31, 2013.  Congress has yet to renew it for 2014.

If you are imminently in danger of loosing your primary residence because you can’t make the mortgage payments, it would be to your advantage to act now before this opportunity is lost.  Consider your options and consequences of each action you can take.

Foreclosure & Debt Relief

If you stopped making payments and have done nothing to resolve the problem your lender will eventually foreclose.  In some cases this can be as little as 6 months and in others as much as 2 years.  The consequences of letting the bank take your home by foreclosure can have a very severe effect on your credit and employment.   The Act may benefit you but only if the foreclosure is completed in time.    See the Short Sale vs Foreclosure chart.

Short Sale & Debt Relief

If you sell your home by the ‘short sale’ method you stay in control and here’s how.  After an offer is approved by your lender, you still have the option to accept or reject their conditions. The one we are most concerned about is whether they will approve a $0 balance on your mortgage, or declare a deficiency judgement against you.  If your lender approves a $0 balance that’s great but they will still issue a 1099-C.  Mortgage debt forgiveness has now become taxable income according to the IRS.  Fortunately, the Mortgage Forgiveness Debt Relief Act of 2007  eliminates the tax bill  This is the best outcome of a short sale. A Realtor who is a good facilitator will greatly increase your chances of success.

If the lender will not agree to a $0 deficiency you and your agent will have to weigh your choices.  For some it may be best to accept the deal offered, and for others it may be better to reject it and renegotiate with the lender.  In almost 0% of the cases would it be better to let the bank foreclose.  By the way – Banks would rather settle through a short sale because it saves them $50,000 and more. So they are motivated to work with a homeowner and agent who are trying to also avoid foreclosure.  When there are delays or offer rejections it’s not that the bank does not want to work with you, they do, but sometimes the investors who own the mortgage are unwilling to accept offers in the hope of getting a better one.

For more articles on this subject go to either Short Sales or Foreclosure Alternatives in our Sellers section.

Mortgage Debt Forgiveness & The Reason You’ll Need Help

Angela Kniep Realtor

Real Estate Professional for 35 years.                       

One thing you must have is a Realtor who is experienced in short sales because banks will not allow the homeowner to sell his or her home by the short sale process.  The process requires timely submittal of documents, good communication skills with the bank’s asset management department, and a mastery of putting all the pieces of the puzzle together to make this work  Angela Kniep is that Realtor.  Read her resume.

Angela Kniep CDPE (Certified Distressed Property Expert) works every day to bring lenders, homeowners, and buyers to agreement.  Call her today @ 239-877-2325 for any questions on these issues.

 

 

 

 

The following publication is from the IRS

Ten Facts for Mortgage Debt Forgiveness

IRS Tax Tip 2011-44, March 3, 2011
If you are a homeowner whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income.
Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness.
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1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
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2. The limit is $1 million for a married person filing a separate return.
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3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
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4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
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5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
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6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
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7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
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8. Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
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9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
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10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
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For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit http://www.irs.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.
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You can also use the Interactive Tax Assistant available on the IRS website to determine if the cancellation of debt is taxable. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions
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Taxpayers may obtain copies of IRS publications and forms either by downloading them from http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
About Daryl Kniep
Gulf Region Realty