Tax Implications of a Short Sale
Not much happened in MLS yesterday either in sales or leases. 2 items today:
1. From John Wakes Blog "Arizonarealestatenotebook.com" comes this article:
80% of delinquent homeowners forecast to lose their homes
2. A neighbor in Aviano has waaay too much time on their hands and decided to look into the tax implications of short sales/foreclosures. As always, seek advice from legal and tax professionals if you have questions. Here is what they uncovered:
"Form 1099-C and it's implications - In summary, you will get a form. Thanks to the Mortgage Forgiveness Debt Relief Act of 2007 you can EXCLUDE from your income up to $2 million of the "forgiveness"(diff between mortgage and sale proceeds from short sale or foreclosure). This Act is set to expire 2012.
AZ, by LAW, is a "non-recourse" mortgage loan state and
the bank cannot go after you for the difference.
Two special notes:
1- It MUST be your primary residence.
2- The amount of the forgiveness is limited ALSO if you took out a home equity
loan to use for something other than home improvements.
Example: Bought home for $100, mortgage is $75, later took
out another $5 for a trip to Europe, short saled for $50.
Get form 1099-C for full amount of $25 (75-50) but can
EXCLUDE only $20 and must INCLUDE $5 because it wasn't used for the home.
Below is the website to the irs and a very good edited explanation of the act. For the entire explanation go to irs
Website:
http://www.irs.gov/individuals/article/0,,id=179414,00.html
| If
you owe a debt to someone else and they cancel or forgive that debt,
the
canceled amount may be taxable. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation: What is Cancellation of Debt? If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that 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, Cancellation of Debt. Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you. What is the Mortgage Forgiveness Debt Relief Act of 2007? The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. What does exclusion of income mean? Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But 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. Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts? No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately. Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home? Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681. How long is this special relief in effect? It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012. Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income? The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681. If the forgiven debt is excluded from income, do I have to report it on my tax return? Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return. How do I know or find out how much debt was forgiven? Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982. Can I exclude debt forgiven on my second home, credit card or car loans? Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details. I lost money on the foreclosure of my home. Can I claim a loss on my tax return? No. Losses from the sale or foreclosure of personal property are not deductible. If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt? Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was canceled in a title 11 bankruptcy case. An exclusion is also available for the cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a Midwestern disaster area. See Form 982 for details. If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence? Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Will I receive notification of cancellation of debt from my lender? Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form. Are there any publications I can read for more information? Yes. (1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues. (2) See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov. |
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| From the website: http://www.loansafe.org/forum/foreclosure-laws/4130-recourse-v-non-recourse-states.html List of Non-Recourse Mortgage States and Anti-Deficiency Statutes In a non-recourse mortgage state, borrowers are not held personally liable for more than the home’s value at the time that the loan is repaid. The lender may recoup some of its loss through foreclosure. However, the lender may not sue the borrower for additional funds. If the foreclosure sale does not generate enough money to satisfy the loan, the lender must accept the loss. Each non-recourse state has its own anti-deficiency statutes that prohibit lenders from seeking judgments. In a few cases, anti-deficiency statues do allow lenders to collect a limited amount of money from the borrower (such as the difference between the debt and the fair market value of the property). Note that in some states (such as California) non-recourse laws apply only to “purchase money” loans (i.e. original home loans that are used to purchase property). Almost all HELOCs and home equity loans are considered recourse loans and lenders for these loans may sue borrowers to recoup loss. (Except in some cases where the second mortgage lender forces the foreclosure. See: HELOC Foreclosures). There has been some speculation that mortgage refinances do not constitute “purchase money” loans. However, there have been no cases to determine this issue one way or the other. Anti-Deficiency / Non-Recourse States Alaska Arizona California Connecticut Florida Idaho Minnesota North Carolina North Dakota Texas Utah Washington One Action States In some states, lenders are only permitted a single lawsuit to collect mortgage debt. This plays out differently depending on the state’s laws. In New York, for example, a lender must choose between the actions of foreclosing on the property or suing to collect the debt. The following states have some type of one action statute: California Idaho Montana Nevada New York Utah |
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