Tax Relief for Foreclosures and Canceled Debts

Here are some more of the details about the Mortgage Forgiveness Debt Relief Act of 2007 and how it impacts your taxes. Here is a snippet...

Highlights of Mortgage Debt Relief

* Exclude up to $2 million of debt forgiven or canceled by a mortgage lender on a main home.
* Both mortgage restrucuring and foreclosures qualify
* Available for the years 2007, 2008, or 2009.
* Claim the tax relief using IRS Form 982 (PDF)

What is Canceled Debt Income?
Anytime a lender cancels, or forgives, your debt, that is considered income to the debtor. The tax laws considers this income, and the debtor is taxed on forgiven debt unless an exception applies.

Canceled Debt That is Taxable
Anytime a lender cancels or forgives debt, that is usually a taxable event. "Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income." (Source: Publication 525)

Debt forgiveness is reported by the lender using Form 1099-C, Cancellation of Debt. Individuals report the forgiven debt on their Form 1040, Line 21 as other income.

The tax laws provide several exceptions to the tax treatment of forgiven debts. Tax-free treatment of mortgage debt is the most generous and easiest to calculate.

The whole article can be seen here.

Mortgage Workouts, Now Tax-Free for Many Homeowners

The nice people over at the IRS has some good news for all the troubled homeowners. Lets hope that it helps...

Homeowners whose mortgage debt was partly or entirely forgiven during 2007 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their 2007 federal income tax return, according to the Internal Revenue Service.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on IRS.gov.

“The new law contains important provisions for struggling homeowners,” said Acting IRS Commissioner Linda Stiff. “We urge people with mortgage problems to take full advantage of the valuable tax relief available.”

Here is the link to the full article...

Two New 2007 Tax Breaks

While taking a look around SFGate, I saw a headline that could brighten up a Monday Morning. "Two new 2007 tax breaks help struggling homeowners" of course sounds goods, but what does it really mean?

In a year of bad mortgage news, there's a bright spot or two for homeowners: Foreclosure comes with a tax break, and 2007 mortgage insurance payments may be tax-deductible.

Congress acted on both provisions late last year, extending the mortgage insurance deduction for three more years and creating a tax break for homeowners facing foreclosure.

The mortgage insurance deduction will help certain low- and moderate-income homeowners, especially first-time home buyers and those struggling with higher house payments as adjustable-rate mortgages reset.

This type of insurance should not be confused with the insurance you take out on your home and its contents in case of fire or other disaster. It's also not the same thing as mortgage protection insurance, which is a form of life insurance some people buy to pay off a mortgage when they die.

So now if you are facing down the barrel of a foreclosure shotgun, you at least have something to smile about :(

Here is the article...

What Causes Interest Rate Movement

Here is a snippet of an article that covers some of the finer points that are involved with interest rate movements.

Consumers are often misled when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. Often the media is the culprit causing the confusion. In the last few years, the Fed has taken action that caused mortgage interest rates to move in a direction other than what consumers expected, because the media provided weak reporting on the subject.

The Federal Reserve affects short-term interest rate maturities, the Fed Funds rate, and the Overnight Lending rate. These factors have a direct impact on the Prime rate. If you took only this into consideration, you may mistakenly conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. However, mortgage interest rates are dictated by the trading of mortgage-backed securities, which trade on a daily basis. The real dynamic at the heart of interest rate movement is the relationship between stocks and bonds.

To finish reading this article, check out the Real Estate Blog...

Mortgage Rate Reset

I was reading some articles over at Bloomberg.com and came across this piece...

This will be a brave new year for U.S. homeowners with adjustable-rate loans.

Terms will be tougher for the credit-challenged. Fewer bargain teaser rates will be offered. And for those facing higher resets on adjustable-rate mortgage payments, it's time to negotiate.

If your mortgage is ratcheting up to a monthly payment you can't afford, you may have some leverage in lowering the rate. Your lender may even welcome the move and allow you to do a low- cost loan modification.

To date, some $150 billion in adjustable loans have reset with $300 billion more in the pipeline, according to the Federal Deposit Insurance Corp. The greatest number of mortgage-rate increases is likely to hit borrowers this year.

In many cases, your lender may call you first to see if you want to modify your loan's terms. That's what happened to Dick Lepre, a loan officer for Residential Pacific Mortgage Corp. in San Francisco.

John makes some good points in the article, and had some good tips. Like he said in the article "It costs nothing to ask."

Here is the full article...

Reverse Mortgages: A Way Out of a Bind for Older Homeowners

I am sure that by now you have heard of Reverse Mortgages, but do you exactly understand what they are? If not, the following article should help you out...

Reverse mortgages used to be a way for homeowners to get extra cash during retirement. Now they're also being used for a more-pressing purpose: helping people who are struggling to meet payments on high-interest-rate loans to keep their homes.

The strategy, which is relatively novel but gaining popularity among legal-aid attorneys and housing advocates around the country, calls for persuading lenders to take the cash generated by a reverse mortgage in lieu of foreclosing on older homeowners.

With a reverse mortgage, the bank makes payments to the homeowner instead of the homeowner making payments to a bank. The loan is repaid, with interest, when the borrower sells the house, moves out permanently or dies. The products are complex and have high fees -- typically about 7% of the home's value -- and they make it difficult for homeowners to leave the property to their heirs. But they may be the best option for people who have built up equity in their home and would otherwise lose it.

Here is the link for the full article...

No Taxes on Forgiven Mortgage Debt

A collective sigh of relief from a lot of Americans...

Congress passed legislation Tuesday to protect mortgage borrowers from getting a surprise tax bill when they restructure their loans to avoid foreclosure.

The House adopted legislation passed by the Senate last week to spare homeowners for three years from taxes as high as 35% on canceled mortgage debt.

"Homeowners who restructure their mortgages to avoid foreclosure should not be hit with a tax bill as a result," Treasury Secretary Henry M. Paulson Jr. said. "This legislation will temporarily exclude homeowners who have restructured their mortgage loans from having to pay taxes on the mortgage debt forgiven."

Here is the full article...