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emc011075
emc011075, Tax adviser
Category: Tax
Satisfied Customers: 3169
Experience:  IRS licensed Enrolled Agent and tax instructor
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Did the Mortgage Debt Relief Act get extended through 2015?

Customer Question

Did the Mortgage Debt Relief Act get extended through 2015? If someone does a deed in lieu of.....have to pay the debt forgiven as ordinary income....
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.

Hi. My name is ***** ***** I will be happy to help you.

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.

Customer: replied 1 year ago.
what is the legal requirement, definition of insolvent to satisfy the government...
Expert:  emc011075 replied 1 year ago.

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.

Expert:  emc011075 replied 1 year ago.

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.

I see you offline now. So if this answered your question, please take a moment to rate my response so that I may receive credit for assisting you today. However, if you need clarification, or want to discuss this issue further, let me know. Thank you.

Expert:  emc011075 replied 1 year ago.

I see you read my respond. Do you have any questions? Is there anything else I can help you with today? And if you found my answers helpful, a Positive Rating would be greatly appreciated. Thank you.

Customer: replied 1 year ago.

hi are you saying that debt forgiven by the bank does not count when determining whether you are solvent or not?

Customer: replied 1 year ago.

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

Expert:  emc011075 replied 1 year ago.

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.

Expert:  emc011075 replied 1 year ago.

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.

Customer: replied 1 year ago.

what if the full amount is forgiven through a deed in lieu of foreclosure...

Expert:  emc011075 replied 1 year ago.

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.

Customer: replied 1 year ago.

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?

Expert:  emc011075 replied 1 year ago.

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.

Expert:  emc011075 replied 1 year ago.

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.