Disclaimer: I am by no means an attorney, a tax professional, nor a politician. What follows is my interpretation of the Mortgage Forgiveness Debt Relief Act of 2007. As always, consult your attorney and tax professional for specific questions! And if you think it will help to consult your politician, well… knock yourself out!
My recent post on the Mortgage Cancellation Relief Act generated several questions asking for clarification. Questions fell into two primary areas: 1) which of the two acts will be sent to the President for signing; and 2) what is the definition of “primary residence” and will this act cover my personal situation.
Question #1 is the easiest to answer. The House version of the bill (H.R. 3648), titled the Mortgage Forgiveness Debt Relief Act of 2007 was amended by the Senate and as of yesterday (Dec 19) was sent to President Bush for signing into law.
Here is the entire text of the bill as sent to the President.
Everything I’ve read indicates the President will sign this bill into law. UPDATE: President Bush signed the bill into law as I was writing this post. Here are his remarks.
Question #2 requires some interpretation and again, I’m no lawyer or politician. Bills and IRS Codes contain language that only graduates of Politi-speak 401 and those fluent in IRSeese can fully comprehend.
Here is an example from the bill:
Paragraph (1)(B) shall not apply to a discharge to which paragraph (1)(E) applies unless the taxpayer elects to apply paragraph (1)(B) in lieu of paragraph (1)(E).’.
And I’m not even going to quote from the two sections of applicable IRS Code (sections 108 and 121). Read them at your own risk.
I have read the bill in its entirety and cross-referenced the IRS Codes, well past the point of getting a massive headache, and here’s what I think in highly condensed normal people English.
The Mortgage Forgiveness Debt Relief Act removes the potential tax liability associated with a “short sale”. To borrow the example from my previous post, that tax liability plays out like this:
Say Joe Homeowner owes $300,000 on his mortgage. His lender approves a “short sale” that will net the lender $250,000. But Joe owes $300,000. The lender “forgives” this $50,000, but is required to report that to the IRS. Our buddies at the IRS then say, “Hey Joe, you owe taxes on that $50K, pay up!”.
Depending on Joe’s tax bracket, the taxes owed on that $50,000 in forgiven debt could run into the thousands (potentially many thousands).
There are, of course, some limits and restrictions….
The maximum amount of “forgiven debt” is $2,000,000. I *think* this is for a married couple filing jointly and the limit for a single person is $1,000,000. Regardless, I doubt these limits will impact many.
The bill only applies to a “principal residence”. So investment properties and second homes in a short sale situation are not eligible. This leads to the obvious question of “what is a principal residence?”
From the bill:
`(5) PRINCIPAL RESIDENCE- For purposes of this subsection, the term `principal residence’ has the same meaning as when used in section 121.’.
When I first read the bill, I thought this was referencing “section 121” of the bill itself. But there is no section 121 in the bill. So it appears to be referencing Section 121 of the IRS Code, which actually makes sense because IRS 121 defines “principal residence” as:
“. . . during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. “
In short, if you lived in a home you own for 2 of the past 5 years (from the date of sale), it is considered a principle residence. Note the word “aggregating”. That means you don’t have to have lived in the home for two consecutive years in the past 5. Simply go back 5 years from the date of the sale and if you lived in the home for a total of 2 years, it qualifies as a primary residence.
Now someone who owns two homes may be thinking, “Hey, I’ve lived in one house for 2 of the last 5 years and in the other one for 3 of the last 5 years. They are BOTH primary residences!”
Trust me, the IRS has thought of that. My understanding is you have to declare one or the other as your primary residence. They aren’t going to let you have two eligible primary residences.
Important note: The bill clearly states, ” (d) Effective Date- The amendments made by this section shall apply to discharges of indebtedness on or after January 1, 2007.”
So if you had a short sale prior to January 1, 2007 you are apparently out of luck with regard to tax relief from this act.
There is much more gobbledygook in both the bill and the IRS codes. But the gist of it is this:
If you were in a short sale situation after January 1, 2007, and it involved your primary residence, then you will not be liable for taxes on the amount of the forgiven debt as long as it is less then $2 million dollars.
Also included in this bill is an extension of the mortgage insurance premium deduction through 2010 (was slated to end this year). There are also changes to things like S Corp filing penalties, tax benefits for volunteer firefighters and emergency medical responders and more, but my head hurts far too much to even attempt to decipher those sections. If you think they may apply to you, you know the drill about who to consult.
Looking for more information on short sales? Below is a link to all articles written on this site about short sales:
Phoenix Short Sales
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Just complete the form below for a no cost, no obligation consultation with one of our experienced short sale experts:
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Jay – good points. I agree that reading house bills and tax codes can be a good recipe for a headache.
Jay – This will not stem the tide of foreclosures. If anything, we'll see an increase in foreclosures and "jingle mail" (owners turning in the keys via mail). The same people that signed a contract getting into an ARM or Neg AM loan are going to figure this out? If they can't afford their home, how are they going to afford a TAX LAWYER or ACCOUNTANT? The government can't fix *anything*.
Bobby Joe – can't disagree with much there. But at least with this (in theory), Joe Homeowner won't get a 1099 showing $50,000 in taxable income. (I suspect in the past, many Joe Homeowner's have just deposited said 1099 in the trash and hoped the IRS didn't figure it out.)
Douglas – my head still hurts…
I like your disclosures. You must be in loans. If this proposal dosent help anyone with lates; what good is it? I mean there the people "in trouble". I guess we'll see what happens. Here in the Bay Area, CA there are some pockets that could use some help. Good news the 2mil+ market is strong.
Best,
Brian
"The bill I sign today will help this effort by ensuring that refinancing a mortgage does not result in a higher tax bill. Under current law, if the value of your house declines and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as money that can be taxed. And of course, this makes a difficult situation even worse. When you're worried about making your payments, higher taxes are the last thing you need to worry about. So this bill will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. And it's a really good piece of legislation. The provision will increase the incentive for borrowers and lenders to work together to refinance loans — and it will allow American families to secure lower mortgage payments without facing higher taxes."
This sounds as though it is for refinancing not short sales and foreclosures, when I calle dthe IRS they didn't know anything, but the one thing they said was they thought there was a stipulation that you couldn't miss any payments on your mortgage to qualify. I said HOW? foreclosure, the definition of missing payments…. I felt like we weren't talking about the same bill. Then I re-read Bush's statements…. Hmmmm it doesn't sound like this applies to short sales and foreclosures….
Where did you find the bill in its entire format. I would like to read the whole thing, but I can't find it anywhere?
I have a short sale coming up on Wed 12-26-07. It is nice that I am included if this bill applies to short sales, but it doesn't sound like it when I read Bush's press release.
Danielle – I've never seen anything in all that I've read (including the bill itself) that says you can not have any late payments. I suspect that whoever you talked to at the IRS was confusing this bill with the recently announced "HOPE program" (aka the Mortgage Rate Freeze program – discussed briefly here).
That program requires (for the most part) that mortgage payments not be late. It freezes rates on some loans for some people — it is not related to the forgiven debt tax relief law. It is a voluntary program that many lenders agreed to, it is not legislation.
This new Mortgage Forgiveness Debt Relief Act has nothing in it about having to be current on payments.
You can read the entire act via the link in the post that says "Here is the entire text of the bill as sent to the President". (Or just click here.)
As for the President's remarks… keep in mind that politicians like to put the most positive spin on everything. Talking about how this may prevent foreclosures via refinancing is far more positive than talking about people who have to sell their home in a short sale situation.
Read some of the other analysis that is out there, not just the political spin (granted, it's not all that easy to find, but it is out there). This bill seems to clearly apply to people getting 1099 forms on the amount of forgiven debt — regardless of whether that debt is forgiven in a mortgage restructure/refi or short sale.
For example:
From Quicken Loans:
In a move to relieve some of the burden that faces homeowners filing for foreclosure, the US House of Representatives voted to remove a tax penalty known as "phantom income" tax.
Currently, if a lender or creditor forgives all or part of a debt due to a foreclosure or short sale, the amount forgiven is seen as income by the IRS, which is taxable. The IRS requires that lenders send a Form 1099 reporting they cancelled the debt to any homeowners that foreclose or participate in a short sale. The IRS turns around and taxes the homeowner on the "phantom income."
Hope that helps. I'm sure there will be more coming out about this over the next couple of days. Good luck in the sale of your home!
Brian – I'm not a lender, just a real estate agent.
Two ways out
-In the even of a bankruptcy discharge, the forgiven dept can be included in the bankruptcy.
-If the seller can prove his liabilities exceed his assets. The seller will have to come up with evidence of this to IRS when taxes are done.
I'm amazed some agents going short sales dont know this. In most cases lenders will require liabilities to exceed assets to do this. But be careful, its a good idea to talk to your attorney or cpa.
"The seller will have to come up with evidence of this to IRS when taxes are done."
And therein lies the inherent risk in this "out"… it occurs after the fact. It's possible the IRS can deny your petition long after the sale has closed.
Be careful is right. A *good* attorney/CPA should be able to tell you if you'd "qualify" with these outs. Of course, paying for one of those when your liabilities exceed your assets could prove problematic.
Moot point now anyway. At least for the next 3 years.
I'm a loser! I totally misssed that OBVIOUS statement, her's the entire bill!!!!!!!!!!!!!!!!!!!! THANK YOU!! Yes I have come to realize the IRS is clueless, and thank you for clarifying the political spin! I am very, very new to the game and am nervous and wasn't looking forward to the $8500 in taxes I would have to pay because of this housing scam we got into in 2005. Praise God for the passing of this bill, and that it is effective 2007. Our closing is Wed 12-26 at 1pm, I just hope and pray that no one backs out and that it happens and is COMPLETE!!!!!!!!!!! Thank you for all your help!
One more question? Any idea how this will work? Get a 1099-C but when you input your taxes it work change your AGI? Or get no 1099-C like this never happened? Not sure why I care, I just am doubtful even though it is law to not count 1099-c as income from 01-01-07 till 01-01-10, well I have done my preliminary taxes with the 1099-C included and it is not pretty! I am sorry I am so inquisitive borderline neurotic…
You're not a loser Danielle… it's easy to miss something like that and with a close coming up your head is quite likely in other places.
However, if you've already done preliminary taxes you may indeed be a just a tad neurotic! 🙂
I haven't heard anything about how this will work. The simple way would seem to be for the lenders to not even issue a 1099. But the IRS rarely does anything the simple way. Since the bill is amending IRS code, I suspect the IRS will be managing the process — which means how it works will probably be some form that is far more complex than it should be.
Should I happen to hear more, I'll certainly put it in a post here.
Thanks for stopping by, I'm glad I could help! Just remember — I am not an attorney or tax professional….
Good luck with the closing! Stop back by and let us know it's a done deal.
I wonder how long it will be until someone finds a hole big enough to drive a $1,000,000 truck through?
Imagine this situation: A private mortgage holder refinances a home for $500,000. The actual market value of the home is closer to $250,000. The owner stops making payments, and the mortgage holder forecloses. He quick sales the house for $225,000. Obviously he just lost $275,000, so he can write that off as a business loss on his taxes.
But wait… the owner and the mortgage holder worked together on this. The owner made a $250,000 on the sale and has no tax implications. Perhaps this isn't really an arms length transaction. Maybe it was a good way for the mortgage owner to transfer $250,000 in income to the owner without anyone having to pay taxes.
Admittedly, I don't have a good criminal mind… or even one like an attorney or tax preparer, and I might have missed something. But, I just think there is a possibility that this could be seriously misused for activity that may or may not be fraudulent… it might even be legal, but well against the spirit of the law.
I hate the thought of imputed income. I've written about it before, and there are people in DC that have great ideas for using imputed income in truly disgusting ways. But, I think that this particular cure might have some bad side effects… like most things the government gets their hands into.
PERFECT just what i needed today. Iv been hearing a lot of stories about this topic. Im beginning to understand it in depth. Good post..keep 'em coming…
-Ian
I don't think this will stop the increased number of foreclosures or help everyone. But I think all in all it will help some people do a short sale instead of foreclosure. And I think that is positive for both the homeseller and the bank. The government will lose out on tax revenue but at the same time they would not get that money in a foreclosure anyway.
Hi,
First let me ask, is it a simple question of bank greed
squeezing the poor, with ever rising adjustable loans
pushing them into forclosure, and causing the sub prime
crisis?
Also are there exceptions to the new law signed by
Bush, to help short sale tax relief:
a. Is there any timing stipulations on this, our purchase
was years ago?
b. does the short sale tax relief only apply to those
that live in their place, or can it be a property that
was lived in but had to be rented?
Thanks!
Bob
Bob – My opinions only…
a. The only timing stipulation I see is the SALE had to occur on or after Jan 1, 2007. I don't see anything restricting the PURCHASE date.
b. The relief applies to your "primary residence" — defined as above, basically lived in for a total of two of the past five years (from date of sale).
Banks greedy? Nah…
Hey Jay and all of you that read this and care…
My closing was cancelled 🙁 The Buyer is having troubled getting financed! They are going to keep trying maybe get an FHA loan. The bank said they were going to foreclose on the property effective Jan 1st. Significant crying and a $1300 house payment wired same day allowed us one more month! So we have through Jan to get this house closed on! Hopefully it goes through because we are only eligible for the primary residence portion of the tax relief till Feb 1, 2008. If it forecloses it could take over a year to complete and we would not be eligible for tax relief on the 1099 that we will eventually receive from that…
Just thought I would update you. Thanks again for this site!
Sorry to hear that Danielle… it stinks. Thanks though for letting me know, I was wondering.
Thinking positive!
I dont think this will last for long either. Government will review it again when the loss will go over their head.
WOW… this is very interesting. Due to financial hardships that happened to us, we had to do a Short Sale as well. The short sale completed and went through on the last week of August 2007. We almost had to foreclose. The house was appraised at $135,000 and the mortgage company approved the short sale at about $119,000 to avoid foreclosure.
It was an FHA loan on a new house we purchased as our primary residence in 2003.
At closing we were informed that we may be 1099 even though we didn’t have an extra penny in our pocket. We had a sick feeling.
We thought that because it was an FHA loan that the mortgage company would get their money from any losses because of the short sale.
All this work to do everything in our power to avoid foreclosure. And get the news that the IRS may think we made a profit. And that we would still be 1099 even though the loan was an FHA loan.
Some friends of ours consoled us and informed us that a possible Tax solution was in the works for People like us in 2007
They said watch for something called the
“Mortgage Forgiveness Debt Relief Act / Mortgage Cancellation Relief Act”
IS THIS WHAT THEY WERE TALKING ABOUT? It appears that we may qualify and that there may still be hope for us yet.
I’ll email this to our tax person and have her check up on the details!
QUESTION: Jay – Can an FHA short sale loan still be 1099?
I have to wonder about my situation now.? I have one house I lived in for 5 years and was going to sell after I bought a new house.? I was in the process of getting the prior house ready for sale when my roommate died and lost her income and her husband's income, leaving me unable to make payments on the new house (payments about 2-1/2 times that of the prior one), but still able to make the payments on the prior house.? Because of that, I've been focusing on a short sale on the new house (and I'm going to come up $100,000 short on what I owe, so taxes on that would wreck me into bankruptcy out of what would now be a salvageable situation), while figuring I can salvage having a home by moving back to the prior house.
My problem is that having only bought near the end of 2006, I have not lived in the new house for 2 years.? I would certainly call that house my primary residence for 2007, but where does that leave me in all this if the new law says I need to have had it as a primary residence for 2 years?
Also, for those interested in the time interval for which the tax break applies, I just read something that says this tax break applies to debts discharged from January 1, 2007 to December 31, 2009 (http://activerain.com/blogsview/314598/Short-Sale…).
I am trying to figure out if this act will help me in any way. We foreclosed on our home in July. To date and to the best of our knowledge, the house has not been sold. If it was sold, undoubtedly for less than our outstanding debt, will this act relieve us of the burden of paying taxes on the difference between the sale price and the debt? And if it hasn't sold, what does that mean? Last time we were checking the difference was probably 20k-25k. Will we seriously have to count that as income????? Ugh!!! This bill seems to not mention foreclosure, only short sales. Someone, please explain this to me. (and please give me good news)
Hey Jay!
This is Danielle from an earlier post.
OUR HOUSE SOLD!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Short sale yesterday app. $57K deficiency! Amazing! We had to pay a house payment of $1300 and a lot of crying to the bank to get them to extend to us one extra month, but it sold! 2.5 weeks before it was scheduled to go into foreclosure!
Praise God for his perfect timing!!
Now hopefully the bank will honor their word and issue a 1099c (and NOT SUE US) because we are still eligible for the tax relief by 2 DAYS!!!!!!
Just a note to all those reading…everyone says beware of predatory lending…. Well also beware of people coming to you with great alternative ways to "sell your home" without a realtor and basically they make a ton of money off you and your house then leave you high and dry with a trashed house that isn't worth what it was 3 years ago and ISN'T SOLD! And watch out it could be someone you know…
We have let that go and forgave, but people should know what's out there because with the market so bad there are a lot of people starting this scam business and there are a lot of people desperate to sell. Sad situation.
Thanks for everything Jay your web posts have been so helpful!
Danielle
My House is for up for a short sell since Sept 2007, Hasn't Sold…….
I stopped making payments in DEC 2007.
I have owned my home for over 2 years.
I am considering lowering my price again.
What i am trying to figure out is if i would qualify for the relief? and if so what does the relief actually do? Do i never get issued a 1099 or is it just delayed a few years?
I am Confused……. :{
My daughter is having to sell her house due to divorce. They owe about $350K on a purchase money first trust and about $100K on a home equity 2nd (initially with the same lender, Countrywide).
The house will likely sell soon on a short sale for $350K, or, if the bank doesn't approve, she may just hand the keys back or do a deed in lieu.
Question, does this Relief Act spare her tax liability on the Home Equity 2nd mortgage?
(I'm pretty sure it does on the 1st Mortgage).
She has lived in the house for 2+ years, since she bought it in Jan.2006.
Thanks!
Mandi – All that is relieved is your obligation to pay income tax on the amount of the debt forgiven. It sounds like you probably would qualify, but I can't say for sure. I'd consult a tax professional. I'm not sure of the mechanics — I don't know if the lenders still issue a 1099 and then that is "backed out" in the tax form, or if they just don't issue a 1099. I tend to think the IRS will make it as complicated as possible (likely a whole new form).
Paul – The 2nd probably qualifies for relief *if* the 2nd was taken to improve the home, or as part of the original purchase (as in an 80/20 or something similar). From what I'm hearing, "cash out" types of loans that are not used for improvement generally do not qualify for forgiven debt tax relief.
I have to *stress* though to both of you and anyone reading that I am neither a tax professional nor a mortgage professional. I would consult a tax professional with any questions. Every scenario is a little different. The last thing I want to do is hand out inaccurate advice. We're talking a lot of money in these sorts of things. Seeking qualified professional advice is always prudent.
Here is a great article on second mortgages that I would like to pass on
http://www.shortsaledeals.com/secondmortgages.htm
Jay, since not all cancelled or forgiven debt qualifies, the IRS still requires the lender to issue the 1099C. The onus is on the taxpayer to prove to the IRS that all or part of the cancelled debt is not subject to taxation. They do that by filing IRS Form 982. Here is the link – http://www.irs.gov/pub/irs-pdf/f982.pdf. BK or insolvency are other options provided for on that Form 982. According to the IRS, "You were insolvent to the extent that your liabilities exceeded the fair market value (FMV) of your assets immediately before the discharge." The IRS warns that taxpayers should seek professional help with the insolvency claim.
More on insolvency can be found here: http://www.irs.gov/pub/irs-pdf/p908.pdf
Jay, I have been reading a lot of explanations about this Tax Relief Bill on a lot of different blogs, websites and this is by far the best I have read. You really broke everything down and simplified it to make it totally clear for who can take advantage of this Tax Relief and who can't. Great post and information! Alex in San Diego!
I purchased a home in June of 2006. The house needed some work before I moved in. I completed the work moved in and then put my house on the market just before home values began to fall. Once I was unable to get enough money for my old house I could no longer afford the new house bought in June. I moved back into my other residence and then tried to sell the house purchased in June with no luck. The bank has now accepted a short sale and since it was my primary residence but I lived in it for less than 2 years how does the new law affect my situation?
Richard –
I'm not a tax professional, CPA or attorney. I just can't give you specific advice on your particular scenario. Not the answer you probably want to hear, but you should seek professional tax advice.
PLEASE HELP, IF YOU CAN. I AM GOING THROUGH A DIVORCE. WE HAVE A PRIMARY HOME WHICH MY CHILDREN AND I HAVE MOVED OUT OF. WE ARE CURRENTLY RENTING A HOME. IN 2005 MY HUSBAND AND I BOUGHT A SECOND HOME, PORED MONEY INTO IT AND PUT IT BACK ON THE MARKET. THAT WAS 3 YEARS AGO, AND WE CANNOT SELL IT. WE CAN NO LONGER PAY THE MORTAGE AND NOW IT IS PROBABLY WORTH $350,000 LESS THAN WE OWE.
iF WE OWN THE HOUSE JOINTLY AND I HAVE TO DECLARE BANKRUPTY, WOULD BE STILL BE ABLE TO FALL UNDER THE DEBT FORGIVENESS ACT, IF ONLY ONE OF US IS INSOLVENT? WHAT ELSE CAN I DO? PLEASE HELP WITH ANY INFO POSSIBLE
THANKS,
DD
Just a quick FYI about Short Sales and Credit Reporting.
We negotiated our short-sale with the mortgage company and agreed on a price.
5 months after the shor-sale was completed… we noticed that on our Experian Credit Report that the Mortgage company put a comment on our report of "Legally Satisfied But Short of the Full Balance". And because of this, Experian views this in the same category as a forclosure and will list it as "KEY DEROGATORY"!
MAKE SURE YOU GET IN WRITING FROM THE MORTGAGE COMPANY THEY WILL AGREE NOT TO GO BACK AND ADD SUCH COMMENTS TO YOUR CREDIT REPORTS!
Our Credit Score dropped 40 points! On Experian but TransUnion and Equifax list these as "Paid"
So BEWARE!… GET A STATEMENT FROM THE MORTGAGE COMPANY NOT TO ADD DEROGATORY COMMENTS TO YOUR FILE…. Because Experian views Short-Sales same as FORECLOSURES
Watch For it…. Watch For It….
BEWARE!…
Google – "Expirian Views Short-Sales as Forclosures" You'll see others going through the same frustraitions when they thought they were doing things right!
About How short Sales Work Article — Alway Contact an Attorney to discuss Short Sales and how the work!
Why do so many people think they can escape their mortgage using a short sale with no negative credit consequences? I hear this all the time.
Kim – I hear it all the time too. It doesn't make sense. I feel VERY bad for people that get caught up in things out of their control. But let's be honest, a PROMISE was made, and a CONTRACT signed to re-pay a loan. If that loan isn't repaid, there are going to be consequences.
I also see a lot of people that are perfectly capable of paying their mortgage yet they get furious when the lender won't authorize a short sale. Yes, it sucks that house values have declined. But just because you don't *like* making your payment, doesn't mean that the lender is going to say, "Oh that's OK, we'll just forgive you completely for not paying us back tens of thousands of dollars we loaned you in good faith."
I don't think that everyone thinks they can avoid it but a negotiated settlement and paid account that is considered paid and closed is going to be less negative then a foreclosure. Short sales aren't the best option and sometimes they don't make any sense but they can help people in certain situations. In San Diego we have dealt with many people in the Military that have to avoid a foreclosure because of the potential liability they may face and a short sale works better for them.
How does the IRS determine primary residency? I own two homes in the same state and ended up selling one in a short sale. I never filed either home as an investment property and both homes were on owner occupied mortgages.
Kim… unless I’m mis-reading your post, i'm not expecting you to feel sorry for me or others who use this post to be educated on the short-sale process because that’s not what i want… i've owned 2 other houses in the past with no problem… Your assumption that people do not want to pay is actually a sub-conscious "Prejudice" where the assumption is that when people under go trials that is beyond their control there are those in this country who would like nothing more than to see them squeezed under a financial thumb by saying “WELL YOU SIGNED ON THE LINE… PAY UP OR EAT CAKE”. I don't doubt for a second that there are home buyers out there that try to screw the system but PLEASE … i beg of you like the peasants in France did when they were told to eat cake… DO NOT make that assumption with everyone and just grin at it.
Our situation was to remedy a situation the best way we could. The situation was my wife and kids were in an almost fatal car accident that cost us greatly. My wife almost DIED!
I had to choose.
Lets see… hmmm the Material things or the well being of my Wife and kids through their recovery. We qualified for the short sale only… ONLY because we had one of the best past payment histories the Mortgage company had seen. Along with the unforeseen medical reasons beyond our control. Yes i could have just walked off. But NO… i wanted to do what was right the very best i could. I wanted to share my story with others whom are in similar situations that NO… DON'T FORCLOSE but WORK SOMETHING OUT… Negotiate with the Mortgage company that due to circumstances beyond my control i was dealt these cards where i had to take care of my recovering family. Yes we took it hard on our credit of a 20 point drop… Was it fare after all the paper work and negotiations? No… but it actually could have been worse.
Thank you for you post and I do share your concern…. and assumptions paint a pretty good picture of the direction things are headed. I would hope that this post is for an educational experience to show people how to get through trials… Not screw the system by not paying back.. My choice was not to cherish the material things but cherish my family God had rewarded me with. I think…NO i am certain i made the right decision here.
Even if some leave or have the sub-conscious perception of "Let'em Eat Cake" We all know what happened with that. Sometimes giving those whom come under trials or unforeseen occurrences happens to the best of us and I ,like you, use to think the same way… Oh they just don’t want to Pay Back the Loan and trying to figure a way out, I use to say. I have been greatly humbled when I see others going through trials that are real. Short Sales are for such people and not the con-artist. And this post I would at least hope is for those wanting to do what’s right and not hear any perception that they are trying to screw the system or some low-class people that should have never been in a house.
Thank you God for allowing me to pass the test… because I chose short sale verses the well fare of my family. Again i hope i didn't mis-read your comments as an attempt not to pay back things. If it wasn't for mortgage forgiveness act, we would have been on the streets for sure.
RT I must say I also went through the short sale process and due to my company going under the bank approved the short sale. For those who have the misconception you can just do a short sale you are completely wrong. The bank looks through all you financials to see if you truly can't pay you mortgage. I have seen others have their short sale declined because they could afford to pay their mortgage but didn't want to be upside down in their house and were wanting to just walk away and avoid the foreclosure but their plans did not work. I feel for you and your family RT and hope your wife gets better.
RT – so sorry to hear of your troubles. Absolutely 150% family comes first! I hope your wife and kids are fully recovered, or at least well on their way. Hang in there!
Someone who has done their taxes with a forgiven short sale on it can you please lay it out for me. Did you get a 1099? Was there no fed taxes to pay on the forgiven debt? What about state taxes? Just wan tto know what I am in for in Feb. We were forgiven on a short sale about $60,000.
Danielle We had a Certified Tax Person with a good Tax preparing record (NOT HR BLOCK). Yes we were still sent the 1099 and we turned it in with our 2007 taxes year along with copies of the agreement from the mortgage company. And the Debt was forgiven.
In regards to the state Taxes, we didn't have that issue.
This has really helped out a lot of Americans who underwent circumstances or hardships beyond their control.
Although i wonder if something like this would have helped "JOE THE PLUMBER" although his situation is different i hear their have been Tax leans placed on his property… We were fortunate no Tax leans were placed on our property at time of the Short Sale.
I'm afraid that too people know about these to help stop the increase in foreclosures… this should be published in a national newspaper 🙂
So we had taken out a second on our home to do remodeling and pay off some medical bills from my husband being ill. We did an ARM loan and was told at the time that we would be able to refinance at the end of our 3 years. Once those 3 years had hit we went to refinance and the value of our home had dropped $60,000.00. Our payments were going up $450.00 every 6 months. We are almost ready to close the deal on a short sale and I was looking forward to this passing but it sounds like it does not help people like me? Can anyone clarify on this?
Danielle – I am a CPA and I specialize in real estate taxation. Each person's situation is unique of course, but there are a few things that are important to consider. As a general rule, the clients that I have with tax problems are the ones who pulled cash out of their homes and used it for purposes other than significant improvements to the home (bought cars, vacations, paid off credit card debt, etc). This is generally the case with both principal residences and rental properties. But even if this occured, most taxpayers will still be able to exclude cancellation of debt income based on the bankruptcy or insolvency exclusion. Make sure you have a CPA review your situation.
Jay – I am a CPA and I specialize in real estate taxation. Lenders are required by law to issue a 1099-C (debt cancellation) if the debt was recourse and cancelled by the lender. It is between the lender and the taxpayer to notify the IRS (via the tax return) that the cancellation of debt income is not taxable income.Calculating insolvency is definetly tough, but how to calculate it is explained in more detail here ==> http://www.sundincpa.com/real_estate.php
As a CPA who specializes in real estate taxation, there is no requirement to show the "evidence" to the IRS in the tax return. But you must disclose to the IRS that you are not treating this amount as income because you meet the insolvency exclusion. Obviously you don't know whether you can actually meet the exclusion until you perform a detailed insolvency calculation. Make sure to use a tax professional.
Assuming the debt is forgiven, the Mortgage Foregiveness Act will help you avoid taxation on any cash that you pulled out and put back into significant improvements in the home. For any add'l cash that you used to pay bills or other things you are out of luck. However, you may qualify for insolvency or the bankruptcy exclusions. Hope this helps.