The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

There are many people wondering, if they owe a debt to someone and that person cancels or forgives the debt, is the canceled amount taxable as income next year? The answer is: it depends on the type of debt canceled. Generally, if a debt for which you are personally liable is forgiven or canceled, other than a gift, you must include the amount in your income. However, there are exceptions.

According to the IRS, the most common situations when cancellation of debt income is not taxable involve:

• Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
• Insolvency: If you are insolvent when the debt is canceled, some or all of the canceled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
• Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your canceled debt is generally not considered taxable income.
• Non-recourse loans: 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. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

Due to the current housing market, I am sure the exclusion of qualified principal residence debt forgiveness from taxable income is a sigh of relief for many. The Mortgage Debt Relief Act of 2007 generally will allow taxpayers to exclude this discharge of debt on their principal residence. Mortgage debt through foreclosure or debt reduced through restructuring will not be taxable for the calendar years 2007 through 2012. The maximum amount of qualified primary residence debt is $2million ($1 million if married filing separately).

For more information regarding debt forgiveness you may want to visit the IRS’s website or talk to a qualified tax professional.

Tips on Getting Feds to Cut Your House Payment

From MSNBC.com:

If your income slumped along with the economy, you've got plenty of company these days. So much so that the government has a program meant to help you out by cutting your mortgage payments to 31 percent of your gross income. But it turns out that qualifying for this benefit will probably take some fancy footwork, a sympathetic partner and a little luck. Here are some pointers for navigating the terrain.

Get to know the program

The program in question is the Obama administration's $75 billion Making Home Affordable program.

It applies to mortgages held by Fannie Mae and Freddie Mac, the two giant mortgage holders that the government took control of a year ago. Under the government's auspices, Fannie and Freddie are now cutting interest rates on mortgages they own to as little as 2 percent, with the aim of lowing payments to no more than 31 percent of a homeowner's gross income.

How do you know if Fannie or Freddie own your mortgage? The simplest way is to visit each of the lender's Web sites and type in the information requested about you and your residence. Remember: The giant home financing organizations buy loans that were originated by commercial banks and own a significant portion the nation's entire home loan assets. That means you may have taken out your mortgage through Bank of America, Wells Fargo or another private lender, and they may still be servicing your account, while ownership has actually been transferred to Fannie or Freddie (if not, you're out of luck).

If you do have a Fannie or Freddie loan, then figure out what portion of your gross monthly income your housing payment consumes. In this case, your "housing payment" means not only your mortgage costs but your PITI (principal, interest, taxes and insurance). Since you first took out your mortgage, it may have zoomed way up as a percentage of your household income, either because you and your spouse's income has fallen or because the adjustable rate of interest on the loan has ratcheted up. In either case, you should consider applying.

Continue Reading…

More Than 350,000 Homeowners Aided by Federal Mortgage Program

According to reports released this morning, federal mortgage programs have aided a surprisingly large amount of homeowners in the country. So far, over 300,000 families have been helped by the program, which is getting close to President Obama’s goal of half a million. Check out the following clip from a WashingtonPost.com article on the topic.

Lenders have helped more than 350,000 homeowners reduce their monthly mortgage payments through a federal foreclosure prevention program, according to government data released Wednesday morning.

That brings the industry closer to meeting the Obama administration's goal of modifying the loans of at least 500,000 borrowers by Nov. 1. But the data illustrate that some large lenders continue to struggle to address the backlog of homeowners in need of help.

Under the federal program, known as Making Home Affordable, lenders are paid to lower the payments of troubled borrowers. Consumer advocates and homeowners have complained that it's still difficult to reach lenders for help and confusion remains about how the program works.

Since the initiative was launched in March, 12 percent of delinquent borrowers have received help under the program, according to the Treasury data. That is up from less than 10 percent last month.

IRS Limits Home Mortgage Interest Deduction for Gay/Lesbian Couples

The Tax Professor Blog recently posted an entry discussing new IRS limits on mortgage interest deductions that would negatively affect some gay and lesbian couples. Check out the text of the entry below.

The TaxProf email discussion group has been abuzz lately about newly issued Chief Counsel Advisory 0911007 (Nov. 24, 2008; released Mar. 13, 2009), which held that the $1 million limitation on the deduction of mortgage interest on acquisition indebtedness under § 163(h)(3)(B) applies on a per-mortgage basis, rather than on a per-taxpayer basis. The ruling has enormous implications for both gay/lesbian and heterosexual couples who co-own their homes, particularly in states with high housing prices like California. Prior to the ruling, tax folks assumed that unmarried co-owners could each deduct mortgage interest on $1 million of acquisition indebtedness, thus permitting deduction of interest on one $2 million mortgage. The ruling appears contrary to the statute, as § 163(h)(4)(A)(i)(I) defines a qualified residence by reference to § 121, and Reg. § 1.121-2(a)(2) applies the $250,000 exclusion on a per-taxpayer basis in a co-owner situation.