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Richard, Tax Attorney
Category: Tax
Satisfied Customers: 53698
Experience:  29 years of experience as a tax, real estate, and business attorney.
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I am a Utah resident. I am being offered a loan modification

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I am a Utah resident. I am being offered a loan modification which includes a reduction in principle and a forgiveness on a portion of the debt on the note. What will the tax implications be for me?

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Under this type of situation the amount forgiven will be taxable to you.
When an obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C.
The Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This relief has been extended through 2013.
You would need to file the form 982. Form 982, Reduction of Tax attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness.
Customer: replied 3 years ago.

My question is specific to Utah, a nonrecourse state according to my internet researching. With that in mind, can the Debt Forgivenss act apply to me?

Customer: replied 3 years ago.

Utah is a nonrecourse state, so will I be eligible for the debt.relief act on my taxes?

Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Hi there....another expert here. In no event would you have any tax impact. Were you in a recourse state, the Mortgage Forgiveness Debt Relief Act would be available to you because of this being your principal residence. But, in non-recourse states, you never get to the point where you need the Act because there is no debt forgiveness. When a debt is non-recourse, you never have any personal liability for the debt. Thus, there can be no forgiveness of a debt for which you never had any personal liability. As a result, the lender should not issue a 1099-C indicating any debt forgiveness and thus there is no need to complete a Form 982 for the Act. I will tell you, however, that some lenders don't understand this and may issue the 1099-C. Should your lender do so, you can either contest the improper issuance of the 1099-C or you can file the Form 982 and utilize the Act to exclude you from any tax impact of it.

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Customer: replied 3 years ago.

In nonrecourse states, doesn't IRS view principle reductions as debt forgiveness?


Thank you so much for following up. They do not. You only have debt forgiveness where you have a recourse loan. If nonrecourse, you are not being forgiven because you owe nothing personally. But, as I said, although inappropriate for the lender to issue a 1099-C in a non-recourse state...which is the notice the IRS is given that there has been forgiven....some lenders nonetheless issue them. Should yours do so, you can, as I mentioned, contest the 1099-C or File the Form 982. Typically in these situations, the Form 982 is the path of least resistance.
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 53698
Experience: 29 years of experience as a tax, real estate, and business attorney.
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