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Originally Posted by nlevander  Hi all, my husband passed 1.5 yrs ago. During his long illness, last 2 yrs of his life was in a nursing home. I either made my mtg payment or the nursing home payment. My son paid the mtg payment for the last yr his Dad was in the NH. The house then went into foreclosure because I lost 3/4th of my income...husband's pension, etc. and didn't bring in enough to make the mtg. payment. I rec'd a 1099A from Country Wide and thought I was ok until I found out that if I refinanced the house I was in deep trouble. I ended up taking out $22.000 extra. Used 10,000 on upgrades. How much trouble am I in?
Is this considered Capital gains?
Thanks -nlevander |
Hello,
I am sorry to hear about your husband and I pray that everything will be fine with you and your family.
I have found this information about IRS debt forgiveness and the example given may be applied to your case.
The Mortgage Forgiveness Debt Relief Act:
If you're forced into a short sale, you'll still get a 1099C from your lender, and you'll still have to file that with your taxes. Now, however, you're allowed to exclude the forgiven amount up to $2 million ($1 million if you're married, filing separately) from your taxable income. In other words, while it's still counted as income, you won't have to pay taxes on that amount of your income.
Who Qualifies for the Mortgage Forgiveness Debt Relief Exclusion?
According to the IRS, you'll qualify for this tax exclusion whether you mortgage debt
is forgiven as part of a refinancing or
if it's forgiven in connection with a foreclosure. In order to qualify for the exclusion, the following conditions must apply:
The debt forgiven must be on a mortgage for your principal residence. The principal residence is qualified based on the amount of time that you lived in it over the past five years.
The mortgage forgiveness must be because of loss of value in your home or because of a forced short sale in connection with a mortgage foreclosure. A forgiveness that is given in return for services performed for the lender is not allowed.
The debt must be forgiven between January 1, 2007 and January 1, 2010.
The debt forgiveness must be on the mortgage used to buy your home.
How to Claim the Debt Relief Exclusion
In order to claim the debt relief exclusion, you'll need to show the IRS how much of the debt has been forgiven. That will require some calculation on your part, because the IRS wants to see the fair market value of your home as well as the amount of your mortgage that was forgiven. Often, when the lender makes out the 1099C or 1099A, they may just put the value of the loan in the field that's reserved fair market value of the home. In some cases, the 1099C or 1099A may not include the fair market value at all.
The IRS wants to see when you submit your taxes, you'll need to include documentation of the fair market value of the home as well as your calculations. If the fair market value of your home - the price that it was sold for - is not listed on the 1099C form, you may do best to hire an appraiser to document the fair market value.
The calculations can get complex if you've taken out home equity loans or a second mortgage on your home as well as the primary mortgage. In this case, special considerations may apply. For instance, the income exclusion only qualifies for "acquisition indebtedness"- money that's spent to buy your home, build a new home or that you use to make substantial improvements to your home.
Suppose you bought a house 10 years ago and paid $80,000 for it with a 100% loan. The Florida land boom was very good to you, and five years later your home had increased in value to $200,000. You took advantage of lower interest rates to do a cash-out refinance for $150,000, paid off the remainder of the original mortgage and pocketed $70,000. When time comes to sell, though, you can only get $100,000 for the property and your lender agrees to a short sale because the home has decreased in value, forgiving $50,000 of the loan amount. Can you use the Mortgage Forgiveness Debt Relief Exclusion to avoid taxes on the $50,000?
That depends, says the IRS, on what you did with the cash-out part of the loan refinance. If you used the money from the refi to pay college tuition or your daughter's wedding, then you'll have to pay taxes on the forgiven amount. If, on the other hand, you used it to make major improvements to your home, then it qualifies for the exclusion - but you'd better be able to prove the expenditures. If you're audited, you may need to provide your original warranty deed, or your HUD-1 form. You may need to show canceled checks, receipts and invoices to show the cost of improvements you made.
Filing For the Debt Forgiveness Exemption
The new law came at the end of the year, after the tax forms for this year had been printed, so you won't find anywhere on the tax forms to make the calculations you'll need to prove you qualify for the exemption. The IRS is suggesting that those who are facing a short sale or foreclosure this year use electronic tax preparation software. The private software companies have worked hard to update their own forms so that you can do all the necessary calculations within the software, then print out the results so that you can attach them to your completed tax return.
Hope this helps.
Take care.
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