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What the Mortgage Forgiveness Debt Relief Act Means for you
On December 20, President Bush signed a law that is meant to help homeowners who are facing foreclosure or who sell their homes in a short sale. Before this law, the Mortgage Forgiveness Debt Relief Act of 2007, if your bank or lender forgave a portion of your mortgage debt because the value of your home had decreased, the IRS treated the forgiveness as taxable income.
How to Claim the Debt Relief Exclusion In order to claim the debt relief exclusion, you'll need to show the IRS how much of the debt has been forgiven. That will require some calculation on your part, because the IRS wants to see the fair market value of your home as well as the amount of your mortgage that was forgiven. Often, when the lender makes out the 1099C or 1099A, they may just put the value of the loan in the field that's reserved fair market value of the home. In some cases, the 1099C or 1099A may not include the fair market value at all. Like your math teacher, the IRS wants to see your work. When you submit your taxes, you'll need to include documentation of the fair market value of the home as well as your calculations. If the fair market value of your home - the price that it was sold for - is not listed on the 1099C form, you may do best to hire an appraiser to document the fair market value. The calculations can get complex if you've taken out home equity loans or a second mortgage on your home as well as the primary mortgage. In this case, special considerations may apply. For instance, the income exclusion only qualifies for "acquisition indebtedness"- money that's spent to buy your home, build a new home or that you use to make substantial improvements to your home. Suppose you bought a house 10 years ago and paid $80,000 for it with a 100% loan. The Florida land boom was very good to you, and five years later your home had increased in value to $200,000. You took advantage of lower interest rates to do a cash-out refinance for $150,000, paid off the remainder of the original mortgage and pocketed $70,000. When time comes to sell, though, you can only get $100,000 for the property and your lender agrees to a short sale because the home has decreased in value, forgiving $50,000 of the loan amount. Can you use the Mortgage Forgiveness Debt Relief Exclusion to avoid taxes on the $50,000? That depends, says the IRS, on what you did with the cash-out part of the loan refinance. If you used the money from the refi to pay college tuition or your daughter's wedding, then you'll have to pay taxes on the forgiven amount. If, on the other hand, you used it to make major improvements to your home, then it qualifies for the exclusion - but you'd better be able to prove the expenditures. If you're audited, you may need to provide your original warranty deed, or your HUD-1 form. You may need to show canceled checks, receipts and invoices to show the cost of improvements you made. Filing For the Debt Forgiveness Exemption The new law came at the end of the year, after the tax forms for this year had been printed, so you won't find anywhere on the tax forms to make the calculations you'll need to prove you qualify for the exemption. The IRS is suggesting that those who are facing a short sale or foreclosure this year use electronic tax preparation software. The private software companies have worked hard to update their own forms so that you can do all the necessary calculations within the software, then print out the results so that you can attach them to your completed tax return. Rate this Article:
Article Tags: Finances, Taxes, Foreclosures, Short Sales, Irs, Reo's, Mortgage Forgiveness, Debt Relief Exclusion Article Source: http://www.articlesbase.com/mortgage-articles/what-the-mortgage-forgiveness-debt-relief-act-means-for-you-328206.html About the Author:
Calum MacKenzie is Owner of Real Living Southern Homes a residential real estate brokerage located in Wesley Chapel, Florida and also serving the Tampa real estate and Land O' Lakes FL real estate markets.
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