Thursday, March 25, 2010

What a Homeowner Must Know About Getting the US Income Tax Exemption on Mortgage Debt Forgiveness

What a homeowner must know about getting income tax exemption of mortgage loan debt forgiveness.
 
And how does a homeowner qualify and get US income tax exemption for debt forgiven by the lender?
 
If homeowner wants to sell his house and owes more on the loan than value of the property, he or she will be talking with a qualified REALTOR and his area and wondering about procedure for short sale. 
 
The IRS gets involved in mortgage principal write-downs, because the tax code generally treats any forgiveness of debt by a creditor in excess of $600 as ordinary taxable income to the recipient.

Under 2007 legislation, certain home mortgage debt cancellations, such as through loan modifications, short sales or foreclosures, may be exempted from tax treatment as income.

What are the tax implications when your lender agrees to debt forgiveness?  Underwater home borrowers can qualify for tax relief when a home lender agrees to lower the amount of debt. 

 
What to know?
 
First.  The federal tax exclusion only applies to mortgage balances on your principal residence -- your main home, and not on second homes, rental real estate or business property.
 
Second:  Your debt reduction can only be for loan amounts that you've used to buy, build or substantially improve your principal residence, which include refinancings that increased your total mortgage debt attributable to renovations and capital improvements of the property.
 
Third:  When your lender forgives all or part of your mortgage balance, the lender is required to issue you an IRS Form 1099-C, a "Cancellation of Debt" notice, which is also sent to the IRS.  This shows amount of debt discharged and estimated fair market value of the house securing the debt.
 
Fourth: If your lender reduces the debt on your house but you continue to own the property and live in it, the IRS will require you to reduce your "basis" in the house, which is your "cost" for income tax purposes (by amount of the forgiven debt).
 
Fifth:  This possible home loan debt-forgivness exemption will expire at the end of 2012.
 
________________

Harrison K. Long, Realtor & broker, Explore Group, Coldwell Banker Previews, Irvine, CA.  CA DRE #01410855.  ExploreProperties@gmail.com.  Lawyer member of the California State Bar Association - State Bar number 69137.  National Association of Realtors, California Association of Realtors, and Orange County Association of Realtors.  Now serving as Chairperson of Local Government Relations south committee at OCAR.  Newport Beach and Irvine area RealtorOrange County real estate broker agent and property information resource.

If you want to claim the homeowner debt-forgiveness exemption for US income tax, always consult with a qualified income tax professional or certified public accountant.  And check out IRS Form 982 at www.irs.gov. 
 

Posted via email from Explore OC Homes

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