Friday, August 22, 2008

Foreclosure or Repossession of Main Home

The current economic crisis is causing record number of foreclosures, short sales and debt cancellations. If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. In the foreclosure, the homeowner relinquishes title of property generally to the bank that holds the first mortgage or deed of trust on the property. Homeowners associations, taxing agencies, and other interested parties will sometimes also foreclose on a property. In case of foreclosures and short sales, when mortgages are not paid in full upon the transfer of real estate, it may be complicated to calculated the tax implications.

If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. If your home was foreclosed on or repossessed, you may have two tax situations:
1. You have a sale. The sale may generate capital gain or loss. You figure the gain or loss from the sale in generally the same way as gain or loss from any sale. But the selling price of your home used to figure the amount of your gain or loss depends, in part, on whether you were personally liable for repaying the debt secured by the home and and whether the debt is qualified principal residence indebtness.
2. You have forgiveness of debt. Debt forgiveness may generate taxable ordinary income.

Form 1099-A and Form 1099-C.
Generally, you will receive Form 1099-A, Acquisition or Abandonment of Secured Property, from your lender. This form will have the information you need to determine the amount of your gain or loss and any ordinary income from cancellation of debt that is not a discharge of qualifying principal residence indebtness.
If your debt is canceled, you may receive Form 1099-C, Cancellation of Debt. You may need to report the cancellation of debt as income. When you borrowed the money you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. However, in case of bankruptcy, insolvency or no-recourse loans, the debt cancellation is not treated as income.

Qualified Principal Residence Indebtness. This indebtness is a mortgage you took out to buy, build or substantially improve your principal residence and the mortgage is secured by your principal residence.

Abandonment. If you abandon your home and have a home debt for which you are personally liable (recourse loan) and the debt is canceled, this is your ordinary income that you must report on your tax return.

Non-Recourse Loan. A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. The lender cannot pursue you personally in case of default.

Mortgage Forgiveness Debt Relief Act of 2007.
The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt of recourse loan on their principal residence. The provision is to exclude cancelled mortgage debt from income applies only to the portion of the debt that was used to buy, build or improve the residence. Debt forgiven in connection with a foreclosure or debt reduced through mortgage restructuring, qualify for this relief.

The act applies to qualified debt forgiven in the years 2007, 2008 or 2009, and the taxpayer may be able to claim special tax relief up to $ 2 million (The limit is $1 million for a married person filing a separate return) by filling out newly-revised Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)) and attaching it to their federal income tax return.

For more information: IRS Publication 523 Selling Your Home

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1 comment:

Stop Foreclosure said...

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Stop Foreclosure