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As it stands right now, it still wasn't extended. It is still in House to be voted on. You can track the progress here: https://www.congress.gov/bill/114th-congress/house-bill/1002/all-actions
Last years they did it in December. There are still many foreclosures, so hopefully the pass the law.
According to current tax law, if you get 1099C discharged debt from principle residence, you will have to be insolvent to exclude it from your income.
You are insolvent if your total assets are less than total liability. IRS has a worksheet to help you figure it out: https://www.irs.gov/pub/irs-pdf/p4681.pdf
the worksheet is on page 9.
You will list fair market value of all your assets you had on day before date listed on 1099C and than list all your liability on the same day. And you don't include the cancelled debt in your asset nor liability.
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hi are you saying that debt forgiven by the bank does not count when determining whether you are solvent or not?
hi are you saying that debt forgiven by the bank does not count when determining whether you are solvent or not? Wouldnt my current mortgage debt be a liability
Yes, your current mortgage debt is still your liability because you are still expected to pay it off, unlike the forgiven debt that you don't have to pay back any.
And the same would apply to HELOC or car loans. Fair market value of your current house or car will be counted as assets and loans/mortgages/credit cards will be counted as liability.
what if the full amount is forgiven through a deed in lieu of foreclosure...
Hold on. I am confusing you. On your insolvency worksheet you use all your liability immediately before the debt was canceled. Which means, before debt was canceled, you were still liable for it. You will include the canceled debt in your liabilities. However, the foreclosed house is NOT your property any more, it belongs to the bank or somebody else, so it will not be included in your assets.
Foreclosure and cancellation of debt are two separate tax issues and they are treated separately. Foreclosure is repossession/transfer of the property, cancellation of debt is forgiving the debt. Most of the time is the entire amount is forgiven it is result of the foreclosure. Banks will usually not cancel your entire debt and leave you the house. You can still get cancellation of debt through loan modification in which case the bank will not foreclose but you are still expected to continue making mortgage payments.
Sorry for all the questions but just one more....and I will compensate you in addition to my original quote....If my bank does a deed in lieu of foreclosure and the amount of remaining mortgage exceeds my total assets,,,,,I should not have any tax to pay is that correct?
It is slightly more complicated but here how it goes. You will add ALL your liabilities, your current mortgage if you have any, other other debt (cars, credit cards) and the CANCELLED debt (not the remaining mortgage but the difference between how much you still owed on the foreclosed property and for how much the bank will sell it + foreclose fees). For instance, if you owed 120K and the bank will sell it for 80K, your canceled debt will be 40K + foreclosure expenses.
Than you will add ALL your assets, fair market value of your current home, cars, property you owe, checking, savings, retirement accounts, investment money.....
If your total liability will be more than your total assets you are considered insolvent.
Until you receive 1099C you will most likely not know exactly the amount of the canceled debt. Auctioned houses are usually sold for about 1/3 less than their actual value, you can use Fair market value listed on your 1099A statement and reduce it by 20% - 30%. That would be expected selling price. You will deduct it from the remaining mortgage plus add 10K for foreclose expenses to estimate your canceled debt. Those are all just rough numbers but if your assets are substantially lower than you are probably insolvent.