Is a Foreclosure on Your Home Taxable? (Part 2)

Is a Foreclosure on Your Home Taxable?, continued

Insolvency and the rules applicable to farmers can be fairly complex to determine and the assistance of a CPA is recommended if you believe you qualify for this exception.

Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.

The Mortgage Forgiveness Debt Relief Act of 2007

Homeowners whose mortgage debt was partly or entirely forgiven during 2008 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their 2008 federal income tax return.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. The amount excluded reduces the taxpayer’s cost basis in the home.

The new law applies to debt forgiven in 2007 through 2012. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.

The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing. 

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision.

Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2008, the lender was required to provide this form to the borrower by Jan. 31, 2009. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

If you have a specific question regarding this article, as a public service, and at no cost to you, I invite you to call me with your question. Since I am in the middle of tax season, I will have to limit our conversation. I will be happy to schedule an appointment for you if you would like further consultation regarding this, or any other matter. Thank you for your interest in reading my tax column.

This column is offered as a public service with the understanding that each person's tax situation is different; that you should consult your CPA before taking any action based upon comments made in this article. Call me and I will be happy to explain my “CPA Quality Tax Preparation at H&R Block Rates” and how you can decrease your tax preparation fees, or go to www.danghazel.com for more information. I can be reached at 540-825-2771.