Mortgage tax question?
My wife and I bought a home in Las Vegas. At the time of sale we took out a first and second mortgage. The second was secured by the property and was used partially for the down payment (to achieve 20%) and the rest used for improvements to the home (we have documentation to prove that). My wife and I had to move for work and were not insolvent or forced to file bankruptcy. The home was foreclosed on this summer, leaving the second mortgage of $133,300 unsecured. The bank is willing to settle the debt for $15,000 cash. My concern is that they will file a 1099c for the difference ($118,300) and we will owe taxes on that amount. I called the IRS help service and they were not certain whether this amount would be covered under the dept forgiveness act.
Can someone please answer my question; will I owe taxes on that $118, 300?
Yes that could very well happen.
Use the search box at the www.irs.gov website for The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
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.
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.
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?
Use the below enclosed website addresss for more detailed information and some question and answers
Hope that you find the above enclosed information useful good luck.
November 4th, 2010 at 11:32 am
Yes they will. You owe and if loan is forgiven then IRS considers it income
References :
November 4th, 2010 at 12:19 pm
Read Pub 4681.
Based on my reading, since it’s acquisition debt or improvement debt and secured by the house, it qualifies.
References :
November 4th, 2010 at 12:43 pm
Guidance from the IRS (see link below, pages 7 and
seems to indicate that as long as you can prove you used the second loan for purchase of the house and/or improvements, then it is covered under the Mortgage Debt Forgiveness Act and is exempt from taxation.
See a good tax attorney or accountant with all your paperwork.
http://www.irs.gov/pub/irs-pdf/p4681.pdf
References :
November 4th, 2010 at 1:29 pm
Yes that could very well happen.
Use the search box at the http://www.irs.gov website for The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
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.
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.
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?
Use the below enclosed website addresss for more detailed information and some question and answers
Hope that you find the above enclosed information useful good luck.
References :
http://www.irs.gov/
http://www.irs.gov/individuals/article/0,,id=179414,00.html
November 4th, 2010 at 2:08 pm
Go to IRS.GOV and download Pub 17 and Form 982 plus the instructions for form 982. You had to move and this was the cause of you having to involuntarily give up your home for a loss due to underwater financial problems. I think this is where the Form 982 with your return will eliminate any taxability of the 1099C. Read the 982 instructions and look the form over.
References :
November 4th, 2010 at 2:46 pm
the form 982 is on the original mortgage
a second and especially unsecured with very likely result in taxable income
but you won’t know this until the bank issues you a 1099 C
References :
November 4th, 2010 at 3:24 pm
From your description, your second mortgage was acquisition debt and was initially secured by the home before the foreclosure. The Mortgage Forgiveness Debt Relief Act does not restrict the exclusion of canceled debt only to first mortgages.
So it appears that your cancelled debt is exempt from the information you have provided. Keep all those records in case the IRS wants to challenge the nature of the debt.
References :
November 4th, 2010 at 3:29 pm
They must issue a 1099-C. This is not optional. They are required to do it. The only way to prevent it is to pay the full $133,000, instead of just $15,000.
If you were not insolvent, then you will owe taxes on it.
References :