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Hi, as long as this was your residence, you will not owe tax.
The Mortgage Forgiveness Debt Relief Act survived the fiscal cliff when it was given a one year extension through 2013. Homeowners who sell their primary residence in a short sale or lose their home to foreclosure or have debt reduced through negotiation will not have to pay taxes on the loss up to $2 million ($1 million if married filing separately)
Are you very familiar with HAMP and the PRA (Principal reduction alternative)?
not intimately BUT what the debt forgiveness turns on is the fact that it's your principla residence, you home, rather than the process for the forgiveness
waiver of taxation on debt forgiveness
Cool. I am trying to figure out what my options are as far as selling the home to be done with it... I'll see if another attorney has some background with that...
Thank you for answering my initial question tho! :)
THanks, XXXXX XXXXX IRS guidance on the tax forgiveness piece:
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.This provision applies to debt forgiven in calendar years 2007 through 2013. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
I CAN tell you that as long as it's considered a short sale )among other things)_ the tax IS waived
Hey Lane. Had another question.
I didn't get a chance to have you elaborate. Does the debt forgiveness only apply to me since I was on the loan? Meaning, can my brother be the one that reports it on his taxes (the 1099-c). Or is it because the loan is in my name only, I am the only one allowed?
Also. If I am not currently living in the home, but it was bought as a primary and lived in as a primary for 3 years, that still counts under the debt forgiveness?
What if you buy the house as a primary, live in it, then move and didn't live in it for 24 months total? What if your job required you to move?
Or. What if you buy the house, are on the loan, live in it with someone else, you move, but they maintain it as a primary residence. Would that still count?
Here are the IRS guidelines on this.They even provide some examples.What matters is (1) ownership and (2) use.See this: http://www.irs.gov/publications/p523/ar02.html#en_US_2012_publink1000200713Just remember that if someone else owned it with you that's ok ... and if someone else lived there with you, that's ok too.It's just ... did you own it for 2 yrs and ... did you live there for 2 yearsHope this helpsLane
When you say 'you', do you mean whomever is on title?
My brother and I are on title, have been since 2008. I lived there some, he lived there primarily for almost 4 years.
So even though he isn't on the loan and I am, because it was his primary for so long, the debt is included?
Not yet. But it's coming. It's a lot. The taxes owed on it would be more than I make in 4 years (seriously). It's one of the largest reduction anyone has ever seen - which is a good thing. But not if I have to pay taxes on it. I'll be screwed.
The IRS publication you sent me to, that's for short term capital gains exclusions yes? The same things apply?
How about the insolvency factor if this ends up not being excludable?
If I am 100% insolvent, the debt is not taxable yes?
I thought the insolvency rule was there to protect individuals who didn't qualify otherwise.
You saying that's not accurate?
Ok, I got you.
I just did the insolvency worksheet... Total liabilities were around $650k. FMV of assets was around $240k, so a difference of $410k.
Did I read this worksheet right in assuming that it would make me insolvent?
I was reading the IRS publication and it just wasn't clear, so I did the worksheet. The part that I misunderstood was the partial insolvency part about the debt being forgiven being more or less than the amount of insolvency and if that's the case, some of the debt has to be included?
I know we are getting off scope here, but it's 730 at night and I wont be able to talk to anyone until Monday so I am trying to get a little better idea so the weekend isn't spent with me thinking I will owe the IRS $150k.
Publication 4681 states that if the amount of insolvency is more than the amount of the debt that was cancelled, you can exclude the entire amount. That appears to be the case here almost dollar for dollar.
Does the amount of insolvency have to be MORE than the amount of the debt forgiven?
I think being insolvent is one thing, then being insolvent and trying to exclude debt is another. In this particular instance, the amount of insolvency would have to be greater than the debt forgiven for me to not owe taxes on it.
And the rule is SPECIFIC to the value of everything immediately prior to the cancellation. So if the debt is cancelled Tuesday. Then I use all the figures from Tuesday. Doesn't matter if the house is worth more six months from now and we sell it for a profit. It only matters at the time the debt is forgiven...
Thanks for getting in such depth with me... I really appreciate it.
Got it. Just from doing this worksheet, it would appear, that even though the amount forgiven is very high, the entire amount would be forgiven.
One last question.
Have you ever seen or heard of someone being audited on just that issue alone in regards XXXXX XXXXX cancelled debt? Especially when it has to do with property and the financial collapse?
I lied. One last question. ;-)
The value of the piece of property that has the debt being forgiven, who determines it's value immediately before cancellation? Would the value be the amount left on the unpaid principal balance AFTER it had been reduced? IE: If they reduce from $200k, to $100k, would the value that day be $100k?