Five Questions: Will I Owe Taxes on Forgiven Mortgage Debt?

Cat Damiano

Mortgage Wars
Sep 10, 2007
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By Nick Timiraos

A key tax provision set to expire at the end of the year could trip up the Obama administration’s push to have banks forgive mortgage debt more often for borrowers who are underwater.


Five years ago, Congress passed a law, the Mortgage Forgiveness Debt Relief Act, that would prevent households from having to treating certain types of forgiven mortgage debt as taxable income.


If the provision expires as scheduled on Dec. 31, it could throw a wrench not only into efforts to trim loan balances for underwater borrowers, but also for short sales, where banks allow homeowners to sell their properties at a loss. Real-estate agents from Nevada to Florida have been using the looming expiration as a marketing tool, telling homeowners that now’s the time to do a short sale because come next January, they might owe taxes on it.


The deadline on the debt-relief measure comes as banks are beginning to cut homeowners’ mortgage balances more aggressively as part of the $25 billion settlement reached earlier this year, as a report released Wednesday showed. Federal agencies, meanwhile, are taking steps to make short sales more attractive.

Here are a few commonly asked questions:


Read More Here;

Five Questions: Will I Owe Taxes on Forgiven Mortgage Debt? - Developments - WSJ
 

ArizonaMover

LoanSafe Member
Aug 19, 2012
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Two very nice point of news / clarification from the WSJ article:

1. "Earlier this month, the Senate Finance Committee passed a one-year extension {of the Mortgage Forgiveness Debt Relief Act}, as part of a broader tax package, on a 19-5 vote. Capitol Hill observers expect Congress to ultimately pass an extension of the provision as part of a series of broader tax measures that will come before lawmakers before the end of the year."

2. "If the mortgage has recourse to the borrower, any cancelled debt is considered income and could be covered by the provision. Debt that’s forgiven through a foreclosure on a non-recourse mortgage isn’t considered income, according to the IRS, so the provision isn’t relevant."
 

Rillion

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Mar 21, 2012
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The Act was extended through 12/31/13 as part of the "fiscal cliff" deal that passed yesterday.
 

Cat Damiano

Mortgage Wars
Sep 10, 2007
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The Act was extended through 12/31/13 as part of the "fiscal cliff" deal that passed yesterday.
Yes it did,
Lawmakers managed to extend the Mortgage Forgiveness Debt Relief Act as part of their 11[SUP]th[/SUP] hour deal to avoid the fiscal cliff.
The extension means homeowners now will be excused from paying taxes on forgiven mortgage debt through 2013. The law, established in 2007, was set to expire Dec. 31.
 

Cat Damiano

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Sid Farcus

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Sep 1, 2011
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It is definitely good news, how far along are you with the settlement?
A settlement in 2012, while still current on mortgage, did not workout. The last payment I made to CitiMortgage (2nd leinholder) was in October. I missed Nov 2012 and Dec 2012 and continue to ignore their calls. I guess that makes me 0 percent along on my settlement. :blink1:
 

Cat Damiano

Mortgage Wars
Sep 10, 2007
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A settlement in 2012, while still current on mortgage, did not workout. The last payment I made to CitiMortgage (2nd leinholder) was in October. I missed Nov 2012 and Dec 2012 and continue to ignore their calls. I guess that makes me 0 percent along on my settlement. :blink1:
Well at least now you have one more year to try to get something worked out. Good Luck on the negotiations.
 

cather

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Feb 6, 2013
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Hi I am new to the forum but wantedd to thank the members for sharing their stories , I have read many and was inspired to look at my situation differently.. I like many have an 80/20 second mortgage is completly under and first is under by about 5000 My financial situation changed drasticallyy in the last year and made a decision to stop paying second since june of 2012. A friend in the mortgage business has been helping out with negotiating a debt settlement and it sounds like we are very close to the end. expecting a fax from bank with agreement terms in a wee or so. the mortgage broker has asked for a provision in the agreement for the bank to NOT send a 1099C. Everything I have read thus far has mentioned that a 1099c is a must. Has anyone else heard of such a provision, he was trying to explain it to me but I didnt get it. In addition, has anyone in this kind of process had a difficult time getting 1098 for last year. Wells has only sent me the one for my first mortgage.
 

Cat Damiano

Mortgage Wars
Sep 10, 2007
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Hi I am new to the forum but wantedd to thank the members for sharing their stories , I have read many and was inspired to look at my situation differently.. I like many have an 80/20 second mortgage is completly under and first is under by about 5000 My financial situation changed drasticallyy in the last year and made a decision to stop paying second since june of 2012. A friend in the mortgage business has been helping out with negotiating a debt settlement and it sounds like we are very close to the end. expecting a fax from bank with agreement terms in a wee or so. the mortgage broker has asked for a provision in the agreement for the bank to NOT send a 1099C. Everything I have read thus far has mentioned that a 1099c is a must. Has anyone else heard of such a provision, he was trying to explain it to me but I didnt get it. In addition, has anyone in this kind of process had a difficult time getting 1098 for last year. Wells has only sent me the one for my first mortgage.
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. This debt may be eligible for the Mortgage Forgiveness Debt Relief Act at that time.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

It was extended through the end of 2013, but may not go beyond that time.
 

omniskye

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Oct 17, 2008
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keep in mind that the 2013 extension only applies to the federal taxes. some states are already working on conforming to the federal provisions. therefore, you may still pay state taxes on the forgiven debt if your state does not conform. in my state (CA), i know the state senate is already looking into conforming. they did so a couple of years back as well, and chances are that it will conform this time around as well.
 

cather

LoanSafe Member
Feb 6, 2013
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Hi Cat, thank you so much for your reply.

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. This debt may be eligible for the Mortgage Forgiveness Debt Relief Act at that time.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

It was extended through the end of 2013, but may not go beyond that time.

you mentioned "Usually have to report" Are there any instances in which they dont .? What if home is an investment prperty and does not fit in to mortgage forgiveness act.
 

Cat Damiano

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you mentioned "Usually have to report" Are there any instances in which they dont .? What if home is an investment prperty and does not fit in to mortgage forgiveness act.
That information is from the IRS link that I included. You can either contact them, but it would be better to speak with a tax professional from your state to ask these questions.

Contact Your Local IRS Office
 

ithelpme

LoanSafe Member
Mar 17, 2013
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I've read alot about the Mortgage Forgiveness Act but one thing is still unclear to me. I know the Act is extended to 12/31/2013 but is the debt forgiven in the year in which the contract between the lender and buyer is signed or is it forgiven on a yearly basis when the lender sends the 1099 because it's typical that the bank will defer the forgiveness in 3 installments, one in each year rather than one lump sum, so I'm not sure how this will play out tax wise.


For example:
Lender has sent the final loan modification docs to the buyer in June 2013 in which the buyer will notarize. In the letter, the bank said they will forgive the principal balance ($90k) in 3 yearly installments, each one ($30k) to occur on the anniversary date of when the trial payment began. My question in regards to Mortgage Forgiveness Act: Come tax time, does the buyer exclude the lump sum $90k as it was drafted in the contract in year 2013? Would the buyer be out of luck since $30k or 1/3 of the PRA (principal reduction alternative) will be forgiven in year 2014 by which then the Act would already have expired?
 

Cat Damiano

Mortgage Wars
Sep 10, 2007
10,541
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48
Colorado
www.loansafe.org
I've read alot about the Mortgage Forgiveness Act but one thing is still unclear to me. I know the Act is extended to 12/31/2013 but is the debt forgiven in the year in which the contract between the lender and buyer is signed or is it forgiven on a yearly basis when the lender sends the 1099 because it's typical that the bank will defer the forgiveness in 3 installments, one in each year rather than one lump sum, so I'm not sure how this will play out tax wise.


For example:
Lender has sent the final loan modification docs to the buyer in June 2013 in which the buyer will notarize. In the letter, the bank said they will forgive the principal balance ($90k) in 3 yearly installments, each one ($30k) to occur on the anniversary date of when the trial payment began. My question in regards to Mortgage Forgiveness Act: Come tax time, does the buyer exclude the lump sum $90k as it was drafted in the contract in year 2013? Would the buyer be out of luck since $30k or 1/3 of the PRA (principal reduction alternative) will be forgiven in year 2014 by which then the Act would already have expired?
You would need to read through the Q&A and the IRS forms in order to understand how the taxes are forgiven.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

A tax professional in your state may also be able to help. When I needed questions answered on a 1099C that I received last year, I went to an H&R Block office and they were able to help me.
 

frustratedincali

LoanSafe Member
Jan 24, 2015
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Hi all, what are the thoughts currently (2017) on owing taxes on forgiven mortgage debt? I'm trying to settle mortgage debt that was part of a variation of a 80-20 loan to purchase a condo originally. I stopped paying on the "second" which was actually a HELOC two years ago. I'm wondering if I settle this debt if I will owe taxes which would be considerable. I believe the mortgage forgiveness act that would have applied to my situation has expired. I don't actually know if it's worth is to settle if I will owe taxes. I'm probably better off taking some other action if that's the case. I don't think I would be insolvent as I've heard they count your retirement in that calculation, but I'm not sure. Thanks for any input.