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If you or someone you know is renegotiating the terms of a home mortgage loan or seeking a “short sale” with a lender, or did so in 2007 or later, the recent federal bailout package may provide some tax relief.
Under temporary IRS and tax law changes, individual or joint-filing taxpayers may receive up to $2 million of cancelled home mortgage debt on their primary residence, and that amount will not be taxed as “income.”
Under traditional IRS regulations and federal tax laws, a taxpayer is required to pay income taxes on any portion of a debt that is forgiven or canceled by a lender. Such a reduction in the loan repayment amount is considered “income” by the IRS, and a taxpayer must pay federal (and state) income taxes on that amount.
This tax applies to home mortgage debt that a mortgage lender cancels. It arises when a lender renegotiates the terms of a home mortgage loan to reduce the outstanding balance due or forgives a portion of a home mortgage loan on a “short sale” of the home. In a “short sale,” the lender agrees to accept less than the total outstanding mortgage loan balance as full and final repayment of the loan when the home is sold. Lenders are motivated to accept a “short sale” to avoid the cost and potentially larger losses and delays involved in a foreclosure.
However, the federal bailout package recently passed by Congress now has temporarily stopped the federal income taxation of cancelled home mortgage debt, including home mortgage debt cancelled in 2007 and later.
Since the temporary changes apply to debts cancelled in 2007, if you included any home mortgage forgiveness as income on your tax return for 2007, then you must file amended federal and state income tax returns to restate your income and claim any refund that might result.
As you might expect, no “gift” from the government comes without a lot of fine print, and the IRS will publish regulations, requirements, and restrictions applicable to this temporary change. And what Congress gives, Congress can just as easily take away. This temporary change could be eliminated or modified in any subsequent federal bailout package on short notice as the federal government continues to assess and respond to the national and world economic turmoil.
So, check with your accountant or tax professional to determine current tax laws applicable to your situation. If you need assistance dealing with your home mortgage lender, renegotiating terms, are considering a “short sale,” or are facing foreclosure or collection action by your home mortgage lender, contact your BPBS attorney as soon as possible.