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Insight as to what the Mortgage Debt Relief Forgiveness Act Really Means

Tax breaks

We’ve had some of Tampa Bay Florida clients ask us what the forgiveness act means to them and if it applies to them and I thought the following summary may help others as well:

This legislation that was just signed into law and good through the end of 2016 now applies to cancellation of debt on the borrower’s  principal residence –

Some brief info from the IRS website:

To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

You have to have lived in the home for 2 of the past 5 years and the value of the loan has to be in a certain range (so the Act does not cover investment rental properties, unless you lived there yourself for a period of time).

So if you’ve had a principal reduction loan modification, short sale, foreclosure sale or deed in lieu where the bank/lender has sent you a 1099-C for cancelled or forgiven debt, this Act provides you a waiver of the taxes on the forgiven debt.  Since often the 1099-C is for tens or hundreds of thousands of dollars, this is important.  This renewal Act covers the past year 2015 as well as the next year in 2016.

However, the IRS code also has an “insolvency” exception to exclude cancelled debt from taxable income.   The insolvency provision in the IRS code  is entirely separate from the legislation regarding “qualified principal residence indebtedness exclusion.”

Lots of information on IRS website if you search “cancellation of debt.”    Here’s the 2014  Booklet with the Insolvency Worksheet, which indicates that investment properties are eligible.

So, if borrowers with principal forgiveness on principal residence do not qualify because debt did n meet above definition,  they also could see if they can exclude the cancelled debt under the insolvency exclusion.

The bottom line is that if you are considering letting your house go and are uncertain of the timing, perhaps doing so this coming year in 2016 is wise considering we do not know if the law will be extended past December 31, 2016.

For more information, please contact Arkovich Law


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