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Forgiven Mortgage No Longer Taxable

The President signed into law a new measure that would eliminate the tax burden on forgiven mortgage debt (read more). With the rise in short sales and foreclosures across the country, many homeowners were responsible to pay tax on any and all of the mortgage balance that wasn't paid or forgiven. A lot of the time, the homeowner didn't know about this until tax time.

For those of you not familiar with this, let me explain.

If your loan balance is $175,000 and you either negotiate a short sale or end up in foreclosure, the difference between what you owe and what the bank receives is a deficiency. Let's say the bank only receives $150,000 from the sale or auction, your deficiency would be $175,000 - $150,000 = $25,000. The bank could send you a deficiency note where you would be responsible for repaying the $25,000 or they could forgive the deficiency and not make you repay it.

If they forgive the $25,000 they would report to the IRS that they did so and then send you a 1099-C at the end of the year.

Cancellation of debt may not always be taxable. There are some exceptions like bankruptcy, insolvency, certain farm debts and non-recourse loans. PLEASE consult with your CPA or professional tax advisor regarding your situation. For more information, check out this IRS publication.

The Cashflow Coach

Posted by Evan Vanderwey, The Cashflow Coach on 01/08/2008 03:32 PM

Comments (8)

mortgage, forgiven mortgage, taxes, mortgage okemos, mortgage lansing, cashflow coach

Post is included in group: Greater Lansing Real Estate

8 Comments on Forgiven Mortgage No Longer Taxable

JAN

2008

Evan, this is a much needed reform. It's ridiculous to be taxing someone's supposed profit while they're losing their home.

I agree with Brian. A person is losing their home and they get taxed on the difference! Does not seem fair.

This is a very welcome reform. We often wonder why it takes so long...and so many injured people for us to do the right thing.

Brian, Wayne & Team DiMuria,

Thanks for the responses, I hope it will help those homeowners get back on their feet. Nothing worse than losing your home and then getting a 1099 form in February saying you owe taxes on the deficiency.

I agree with Brian, this is a much needed tax reform. People loosing their houses have already taken it on the chin. Why continue to pummel them. 8-)

Do you know the bill that President Bush signed? This is great reform for Michigan.

JAN

2008

While your down some people want to keep you there. This is much needed relief for anyone involved.

FEB

This will only apply for 2007,08 and 09. It will go back to what it was before after that. It is also only on primary home and not on vacation, 2nd or investment properties.

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