Learn More About the Mortgage Forgiveness Debt Relief Act

How does the Mortgage Forgiveness Debt Relief Act work? What are the qualifications? What forms do we file with our taxes?

My wife and I purchased a home in 2005. The interest rates shot up out of control and needless to say we lost our home in 2009. We are filing our taxes for 2009. At first when we filed we were told we owned $35,000 to federal and state. I did some research and came across the Mortgage Forgiveness Debt Relief Act of 2007. The problem is we had a duplex. Does the debt relief act of 2007 protect home owners who lived in rental properties they owned? The loan balance was $167,900 and the bank sold the property for $30,600.

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  • Review the tax implications for forgiven debt.
  • Submit IRS Form 982 in a timely manner.
  • Consult with a tax professional, whenever a question of forgiven debt arises.

Under federal law, a financial institution is required to file a Form 1099-C whenever it forgives or cancels a loan balance greater than $600. This may create a tax liability for the debtor because the canceled debt is considered “income” for tax purposes.

However, the Mortgage Forgiveness Debt Relief Act of 2007 provides tax relief for some mortgage loans forgiven in 2007 through 2012. The Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence.

Editor’s note

The Mortgage Forgiveness Debt Relief Act was originally scheduled to expire at the end of 2012, but Congress and the President acted to extend it through 2013. It remains to be seen if they will act again and extend the protections through the end of 2014.

Regarding your question about the duplex qualifying, I can find no indication in the tax code that would disqualify a duplex from the Mortgage Forgiveness Debt Relief Act if half of the duplex was purchased for and used as your household residence.

The Mortgage Forgiveness Debt Relief Act of 2007 includes the cancelation of the complete debt. If the mortgage terms were renegotiated, up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). According to the IRS, 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.

IRS Form 982

The amount of debt forgiven must be reported on Form 982 and this form must be attached to the taxpayer’s tax return.

You qualify for the Mortgage Forgiveness Debt Relief Act if the home was your principal residence. If so, be sure to report the canceled/forgiven amount on Form 982, and include that form with your income tax return. See the IRS document “The Mortgage Forgiveness Debt Relief Act and Debt Cancellation” for more information. Whenever a Form 982 is required, I recommend that professional tax help is used to ensure the form is filled out properly.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

151 Comments

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  • 35x35
    Jan, 2013
    Kevin
    Make sure you share with Arizona homeowners that the MFDRA had little impact on Arizona residents. There are many homeowners who may not fit into the MFDRA and still may not have cancellation of debt tax liability in a short sale. Check out the article Why The Mortgage Debt Forgiveness Act Rarely Applies To Arizona Homeowners to learn more.
    0 Votes

    • 35x35
      Jan, 2013
      Bill
      Thank you for sharing the link to the thoughtful article, Kevin. From my reading, Arizona homeowners with purchase loans should verify whether they have a non-recourse loan. Many of them will not be affected by the extension of the MFDRA.

      However, Arizona borrowers who refinanced their purchase loans could benefit from the extension.
      0 Votes

  • 35x35
    Dec, 2012
    Karen
    I am considering a Deed in Lieu of Forclosure on a commerial property in Florida instead of forclosure. I (not a bank) hold the mortgage. The owner is way behind on payments to me as well as property taxes and is considering filing bankruptcy. Is this a good option? Will he be liable for taxes? Any other considerations?
    0 Votes

    • 35x35
      Dec, 2012
      Bill
      If I understand the facts you shared correctly, you are the lender for a Florida commercial property, and the borrower is hopelessly delinquent. The borrower confided with you his or her idea of filing bankruptcy, and you want to know if a deed in lieu of foreclosure is a good idea. It is clear you are the lender, but it is unclear if your loan is secured by the commercial property. Let's tackle the easy questions first.

      First, you ask this question on a page discussing the Mortgage Forgiveness Debt Relief Act, which does not apply to the borrower here because you mentioned the property is commercial. The Mortgage Forgiveness Debt Relief Act applies to residential property, and not commercial. Second, unless Congress and the President act, the Mortgage Forgiveness Debt Relief Act will expire at the end of 2012.

      You asked about the borrower's tax liability. I see two tax issues here. First, the unpaid property taxes are significant because if the borrower does not pay the property taxes, the county may file a tax lien or even foreclose to collect the amount due. Should it foreclose and you not take action, it could evict any tenant and auction the property, subject to any other encumbrances on the property, such as your mortgage. The second tax issue is also tricky. I will assume you as the lender are not in the business of lending money — you are not a banker. If so, you are not required to issue the borrower a 1099-C. However, I confess I do not know if you are allowed to issue a 1099-C. Consult with a tax lawyer to learn more about the tax implications for you if you are allowed to issue the borrower a 1099-C.

      Finally, your hardest question — is a deed in lieu of foreclosure a smart choice for you. This is impossible to answer without knowing more about your financial circumstances and what an outsider can know about the borrower's finances. If he or she files for bankruptcy, you and all of his or her other creditors are subject to the decisions of the debtor's bankruptcy trustee. If you and the borrower agree to a deed-in-lieu-of-foreclosure, the borrower may not need to file for bankruptcy, and you might be able to work out a better deal than the bankruptcy court dictates.

      Consult with a lawyer in Florida who has real property or contract law experience to learn more about your rights, liabilities, and options.
      0 Votes

  • 35x35
    Apr, 2012
    Joann
    Have a home in foreclosure in the state of Vermont and am awaiting my first hearing after the mediation was unsuccessful. I have been renting the home and living in a different state since 4/2008, with only short stays at the property since. My rental income has been reported each year since. I defaulted on the loan in Oct 2008 and have applied for several loan mods which were denied. Now I'm in way too far over my head and am looking at a default of almost $100,000 due to the long, drawn out process. My current loan was a refi to consolidate debt and pay for some house repairs (no receipts). I believe there could be a problem with the deed and did ask for proof of ownership on the banks part in my answer to the court. I am currently not represented by a lawyer.

    I defaulted due to a disability and have been receiving SSDI as of mid 2010. I have made a minor amount of rental income in the years prior and owed no income tax. My question is - am I running a risk of tax liability if I do not have this settled by the end of this year? Will my deficiency be taxed by the IRS if I am disabled? Is there any other option to avoid a deficiency other than a short sale? I am concerned about a short sale due to the chain of transfers and MERS recorded deed. Thanks!
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      The Mortgage Forgiveness Debt Relief Act is a wonderful law that helped soften the blow of foreclosure. However, it is not the only tool available to people should Congress fail to act and extend MFDRA. See the Bills.com resource Cancellation of Debt Income to learn about CODI, which might help you.

      Congress has a handful of laws to help people with disabilities. For example, there is a tax deduction available for the blind. I know of no law giving a waiver for loan forgiveness, or altering mortgage-related taxes for disabled people. Readers, please offer your reference to these types of laws by clicking on the Reply button below and share what you know.
      0 Votes

  • 35x35
    Apr, 2012
    Michelle
    I foreclosed on a property in April of 2010 it was my primary residence at the time. GMAC that year sent me a 1099 A and they have repeatedly told me that they do not pursue a difficulty which i don't even know if there was one per the 1099 the fair market value was more than what i owed but i am not sure what they sold it for. Should I be worried that they did not send me a 1099 C? I have asked for some sort of letter stating that the account is closed but i have had no luck except for a verbal notification from various reps that the account is closed and that I owe nothing and that GMAC will not now nor in the future pursue any kind of deficiency. They have told me to call the law office that i guess drafted paperwork on the foreclosure, which i have and they say that the case is closed on my property and any kind of letter would have to come from GMAC...I do plan on buying again when I can and I just don't want this lingering over me that some day I can have a lien put on my house or be sued by GMAC?

    I also had a second mortgage with Chase I am settling with them now. I will be submitting payment to them this week to close my account and to have no further debt obligation with them. Does the 2nd mortgage that i had fall under the debt relief Act or is it only for the senior loan which would be GMAC. Chase has discharged about $27,000 that i would have owed and now i am not sure if i will have to pay taxes on that difference. Any advice would be very much appreciated.
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      You have two issues regarding the senior, GMAC deficiency balance.
      1. Can GMAC file an action to collect the deficiency balance? In other words, what is the statute of limitations for a deficiency balance in the state where the property was situated? Consult with a lawyer in the state where you owned the property to get an answer to that question. Tell him or her about the spoken statements GMAC people told you.
      2. The 1099-A for the deficiency balance, which was never followed-up by a 1099-C notice of cancellation. Talk to a tax lawyer to learn if there are any implications for receiving an A and no C.

      Regarding the Chase junior, I cannot answer your question without knowing more about the nature of this loan. The Mortgage Forgiveness Debt Relief Act applies to "forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes." Did you use your second mortgage to "buy, build or substantially improve your principal residence"? If yes, then the Act applies. If it was home equity loan used to consolidate debt (for example), then the Act does not apply.

      0 Votes

  • 35x35
    Apr, 2012
    Dennis
    We've been offered a mortgage modification by GMAC with a significant reduction of the unpaid balance. I understand that the forgiven principal is considered taxable income unless, among other things, the mortgage is for a principal residence (IRS Form 982). What if the mortgage was taken out for a principal residence, but because of the housing crisis, have been unable to sell our home, rented it out and relocated. Because it was our principal residence when took out the mortgage, can we qualify to claim this exemption on Form 982, even though we now live elsewhere?
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      We do not know what standard the IRS uses to determine residency for the purposes of the Mortgage Forgiveness Debt Relief Act. One argument we have read online is the IRS should use the same standard for residency when determining any capital gains taxes owed:
      "if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its sale,"
      However, that is an argument and not a statement issued by the IRS. Your best source of information is a tax lawyer who has experience with mortgage issues. I realize my answer is not what you hoped for. However, I would rather give you a non-answer than one based on speculation.
      0 Votes

  • 35x35
    Mar, 2012
    Dana
    We are considering a Deed in Lieu of Foreclosure but it involves an owner carry loan instead of bank mortgage. Are the requirements still the same?
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      Requirements for what? Please reply below with a bit of clarification about your situation so we can help you find an answer to your question.
      0 Votes

    • 35x35
      Mar, 2012
      Dana
      Sorry under The Mortgage Debt Relief Act of 2007 it states that if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. Our situation involves a private owner who carried our loan and now we are deeding the property back in lieu of foreclosure. Since it is a private owner and they are forgiving a large debt, I was wondering if we would still qualify under the 2007 Mortgage Debt relief act or ??? Thank you.
      0 Votes

    • 35x35
      Apr, 2012
      Bill
      Has the owner issued a 1099-C? There are specific qualifications a lender must satisfy to be eligible to file a 1099-C, and unless the private owner's significant trade or business is the lending of money, then it may not issue a 1099-A or 1099-C. If the owner has issued a 1099-C, the consult with a lawyer who has tax experience to learn if the 1099-C was issued in accordance with the law.

      Should you file a Form 982 if there was no 1099-C? A good question. Consult with a tax preparation professional to discuss your options.
      0 Votes

  • 35x35
    Mar, 2012
    Lannette
    I live in Arizona and I am upside down in my house. I know that AZ is a non-recourse state. Is this changing after Dec 2012? Is the AZ Debt Forgiveness Act and being a non recourse state the same thing? Is the Mortgage Debt Relief Act different from the AZ's Mortgage Debt Forgiveness? Act? I am so confused with all these Acts and what will effect me in AZ. Please help me figure this out......
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      A quick search of the Web did not reveal an "Arizona Debt Forgiveness Act." Can you cite a Web address for a resource where we can learn more about it?

      The President proposed an extension to the Mortgage Forgiveness Debt Relief Act (MFDRA), which is set to expire at the end of 2012. To date, Congress has not acted on this proposal. Why is MFDRA significant? When a bank forgives a debt greater than $600, the bank is required to submit a 1099-C to the IRS and the borrower. Under MFDRA, mortgage debt forgiven is not taxable.

      A "non-recourse" loan is one where the lender may not pursue the borrower for any deficiency balance.

      Consult with an Arizona lawyer who has real property experience to learn if your loan and situation fits Arizona's anti-deficiency rules.
      0 Votes

    • 35x35
      Mar, 2012
      John
      I'm also confused by this situation... My Arizona attorney said that because AZ is a non-recourse state and the deficiency is never considered to be collectible in some situations, there are no tax reprocussions. My San Diego, CA-based CPA had a conflicting statement that the federal IRS laws are in effect, regardless of Arizona state laws and there will be taxes on the canceled debt. Let me know if you uncover more info! :)
      0 Votes

    • 35x35
      Mar, 2012
      Bill
      If the Mortgage Forgiveness Debt Relief Act (MFDRA) applies to a taxpayer's situation, then whether the home loan is subject to the taxpayer's state anti-deficiency laws is irrelevant.

      Let us assume for a home loan is not subject to MFDRA. Let us assume the taxpayer resides in a state with an anti-deficiency law, and the loan fits the law. State law makes it illegal to collect the deficiency balance. Is a bank forgiving a loan it is barred by law from collecting? The dictionary defines forgiveness as a voluntary act, and complying with state law is not voluntary. However, the IRS's definition of forgiveness may be different.

      I confess I do not know an authoritative answer to your question. Please ask your CPA to cite his or her sources, and share them with your fellow readers here.
      0 Votes

  • 35x35
    Mar, 2012
    David
    I recently settled a Home Equity debt with the lender. I paid about 10% of what was owed, and the rest was forgiven by the lender. I had the home equity loan to help me purchase the home I am currently living in. Will this qualify me for the act?
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      There is no requirement I read in the Mortgage Debt Relief Act of 2007 that requires the debt be a first or senior loan. Therefore, if you can argue that your junior was a purchase money loan, then the Mortgage Debt Relief Act of 2007 applies. Consult with a tax attorney for a more in-depth analysis of your situation.
      1 Votes

  • 35x35
    Feb, 2012
    Mike
    My house was short saled in 2011 in North Carolina and when I filed my 2011 taxes, I owe little in Federal taxes but over 10k in state taxes. Do the states follow the Mortgage Forgiveness Debt Relief Act or am I liable for these taxes?? Also, my ex was on the mortgage. Would she be responsible for half of these taxes??? Thank you
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      One state, California, passed a state law that parallels the federal Mortgage Forgiveness Debt Relief Act for state taxes. I have not found a similar state law in North Carolina. I hasten to add that I am not an expert on North Carolina law, and my search was brief. Consult with a tax lawyer in your state for a better answer regarding North Carolina's tax law and forgiven mortgage debt.

      Regarding your ex-spouse, if both spouses are jointly liable for the mortgage debt, both spouses should coordinate so that between them they report the total amount of the cancellation of debt. To avoid a mismatch with the forms reported to the IRS, both spouses should attach statements to the return explaining the duplication. Consult with a tax preparer or tax lawyer if you have further questions about your situation.
      0 Votes

  • 35x35
    Feb, 2012
    Liz
    I sold my house in KY in a short sale and closed January 26, 2011. The company I had my mortgage through, morEquity, went out of business February 1, 2011 and had all of their loans transferred to another company. I have yet to receive a 1099-C for the short sale. I called the mortgage company but all phone numbers have been disconnected. I called the company that took over the mortgage services from MorEquity and they have a record of me but not the mortgage. I called the company that owned my Mortgage company and they said they see my name in their records, but when they click on my county it tells them to contact the new mortgage servicer. So I have now called three places, no one has my records for the short sale, I called the IRS but they tell me they won't get a copy of the 1099's until may or June. I'm not sure what to do. Should i just file with what I have and if the IRS comes back and says they have a 1099-C for me I could file an amendment to my taxes with form 982?
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      I think your suggestion is a good option. The other options is to file the Form 982 and list the amount forgiven and indicate to the IRS that no 1099-C was received. I advise you to speak with a tax professional, to see which option he or she recommends.
      0 Votes

  • 35x35
    Feb, 2012
    Bella
    We are in Michigan. Shortsale was approved but 2nd lien holder has recently sold debt and collection agency is trying to collect from sellers. Does the 2nd lien holder not fall under the Obama Debt Relief Act? Seems that none of the banks go without placeing the disclaimer that they may or may not come after you.
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      I am not sure what you mean by the Obama Debt Relief Act. There was a law passed when President G.W. Bush was in office, the Mortgage Forgiveness Debt Relief Act, that exempted from taxation the amount of debt forgiven on a primary residence from 2007 through 2012, with some restrictions. This only applied to the taxes due, not to the debt itself which could be owed to the lender for the deficiency balance. Depending on your state anti-deficiency laws, you may have liability for the deficiency balance.
      0 Votes

  • 35x35
    Feb, 2012
    Michael
    We sold our home in a short sale in December 2011, now we our filling out our 2011 taxes. We completed all our forms and our credit is being recognized at federal level. However, our state, Kentucky, taxes are showing that we owe a large sum of money. Does the debt forgiveness act apply to Kentucky state income taxes?
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      The Mortgage Forgiveness Debt Relief Act applies to federal income taxes for residents in all US jurisdictions. One state I know of, California, created a Mortgage Forgiveness Debt Relief Act for California state taxes. I was unable to find any reference to a Kentucky law that creates a Mortgage Forgiveness Debt Relief Act for Kentucky state income taxes. Consult with a tax professional in Kentucky to learn for certain if such a law exists.
      0 Votes

  • 35x35
    Feb, 2012
    Jay
    My wife and I sold our VA home in a short sale. This home was our primary residence for more than 2 years over a 5 year period, but we did convert it to a rental when we moved out of the area and could not sell the home. We rented the home for a loss for approx. 2 years. Do we qualify for the Mortgage Relief Act?
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      The IRS regulations apply to your primary (or principal) residence. However, the home may not have to be your primary residence today. It may apply if your home was your primary residence for a certain number of the past five years. Speak with a tax professional about this.
      0 Votes

  • 35x35
    Feb, 2012
    nathan
    Is the mortgage forgiveness debt relief also valid in Washington state? We short sold our property there and closed this January 2012. B of A said that the deficiency was waived. We would like to know if this debt relief can help us.
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      The Mortgage Forgiveness Debt Relief Act is federal and applies to your federal income tax return. Some states, such as California, have corresponding rules that apply to state income taxes. Washington does not have a personal or corporate income tax, so I doubt you must pay state tax on any mortgage forgiveness.
      0 Votes

  • 35x35
    Feb, 2012
    Mark
    I am curious about the monies I received from Bank of America in regards to its taxability. I received a relocation assistance payment check after settlement of my principal home for $2904. BoA helped themselves to $96 for some obscure charge. (I think they should have not done that.) Anyway, I need to know if this is a taxable event. I have read that it may be taxable. A BoA rep has told me over the phone that they will be sending out 1099s. Does that mean that I must pay income taxes on it?
    1 Votes

    • 35x35
      Feb, 2012
      Bill
      It is unclear to me that a cash-for-keys payment would be considered income. If it is part of a debt forgiveness, then I can see it would be. If it is considered a payment for cleaning the property before you depart, then again it is income. Readers, please write your arguments below for a cash-for-keys payment not being income.
      0 Votes

    • 35x35
      Feb, 2012
      Mark
      Although at the start it might have been called the cash for keys program, it is considered an incentive payment for relocating assistance according to the writings from the Home Affordable Foreclosure alternatives Program. (HAFA) You would think that at a time of need, (my case was due to divorce and gaining child custody, hardly a strategic default), taxing that would be akin to adding insult to injury.
      0 Votes

  • 35x35
    Dec, 2011
    Tao
    I have a question about the debt forgiven and the income tax liability. Since the mortgage forgiveness debt relief act will expire by the end of 2012, so what is the date of this forgiveness to occur in order to qualify for the tax relief? is that the date of judgement of foreclosure? but at that time, no one knows the amount of the forgiveness yet. Or it is the date of foreclosure sale date? which can be much later, pass the end of 2012, and the relief act will be expired by then. Thanks!
    0 Votes

    • 35x35
      Dec, 2011
      Bill
      My understanding is that it is the date that the debt is forgiven by the lender. You are correct that, unless the Mortgage Forgiveness Debt Relief Act is extended, any debt forgiven after December 31st, 2012 will not be eligible.

      I recommend that you discuss your specific concerns with a tax professional, so you get authoritative answers to questions that can have a serious repercussions.
      0 Votes

  • 35x35
    Dec, 2011
    Joy
    We would like to file for the Mortgage Forgiveness Debt Relief Act, however our lender will not give us the 1099-c. Our house was foreclosed in Dec 2009. We did receive the 1099-a and filed this with our 2009 tax. will this be enough for us to be eligible to file for the Mortgage Forgiveness? We live in California. Thank You
    0 Votes

    • 35x35
      Dec, 2011
      Bill
      The lender sent out the 1099-A form informing you of intent abandonment of debt. However, that is not the act of abandonment of debt. This must be done by IRS form 1099-C. The creditor is not required to abandon the debt. It is not clear in which manner you attached the form to your 2009 tax returns. The correct form to use for reporting canceled debt is IRS Form 982. Consult with a certified tax preparer or adviser.
      2 Votes

    • 35x35
      Jan, 2012
      Diane
      I am very confused also we received a 1099A-also, we did leave the property only after we were informed that it would be foreclosed due to non-payment, we didn't want to be out in the cold. We were very unfamiliar with all of this. We also got a letter before foreclosure stating that we were not legally responsible, but then the property has changed banks several times, and the last bank after sheriffs sale, put a judgment against my husband.
      0 Votes

    • 35x35
      Jan, 2012
      Bill
      Consult with a lawyer in the state where the foreclosure took place and a tax professional. The lawyer will advise you about legal liability you have, if any, for the deficiency balance and the tax professional about potential tax liabilities. Ask both if you are protected by the Mortgage Forgiveness Debt Relief Act.

      Show both the letter you received stating you are not responsible for the debt. Give the 1099-A to the tax professional so it is handled properly on your return. You may also find it helpful to read the Bills.com foreclosure and a 1099-A resource.
      0 Votes

  • 35x35
    Nov, 2011
    Jami
    My husband owned a condo and lived there for 2 years before we got married. It is a 1 bedroom so we have been living in an apartment for 2 years. The 1st year we rented it out and lost $700 a month. The 2nd year it has been sitting vacant while we have been qualifying for a deed in lieu of foreclosure. We have finally been approved. Can we qualify for the Mortgage Forgiveness Deft Relief Act?
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      You are deep into a gray area. I realize you want a simple "yes" or "no" answer to your question, but the test of what a "primary residence" is under the Mortgage Forgiveness Deft Relief Act has not been litigated, to the best of my knowledge. Consult with a tax lawyer who can analyze your situation in more detail.
      0 Votes

  • 35x35
    Nov, 2011
    Just to be sure I understand correctly, The Debt Relief Forgiveness Act ONLY applies to a primary residence?
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      Yes. The IRS regulations apply to your primary (or principal) residence. However, the home may not have to be your primary residence today. It may apply if your home was your primary residence for a certain number of the past five years. Speak with a tax professional about this.
      0 Votes

  • 35x35
    Nov, 2011
    Jason
    We had a short-sale in 2011 on a home where we had both a primary mortgage and a HELOC. Both loans were forgiven with the short sale of the house but I don't have paperwork which "proves" that the HELOC was spent for improvements to the home so the amount forgiven from the HELOC doesn't fall under the exclusion provisions of the "Mortgage Forgiveness Debt Relief Act". I understand that there is IRS Form 982 which can be filled out to declare "insolvency" at the time the debt is forgiven and I am fairly certain that my liabilities exceeded my assets at the time of the short sale. Here is my question: Can I exclude the amount forgiven from my primary mortgage using the provisions of the "Mortgage Forgiveness Debt Relief Act" and then exclude the amount forgiven from the HELOC using the "insolvency" exclusion or do I have to use one method or the other?
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      Before I answer your question, I want to challenge a key assumption in your question: "...I don't have paperwork which 'proves' that the HELOC was spent for improvements to the home..." I assume you mean that you do not have receipts for your home improvement purchases. Consider writing an affidavit, a sworn and notarized statement, that outlines what you spent on your home improvements. Include before and after photographs of the improvements to show the changes. A statement from a contractor who worked on your home would be additional persuasive evidence that you spent your HELOC funds on the improvements. The IRS may challenge you on such an affidavit, but if it is convincing and evidence rich, you may convince a tax court that your HELOC was spent on home improvement.

      Regarding your question, because the loans are separate you can use the Mortgage Forgiveness Debt Relief Act on one and the insolvency exception on the other.
      0 Votes

  • 35x35
    Nov, 2011
    Maryland
    I must do short sale on a ARM property with the next 60-90 days that I used to live in from 2000-2007. After I complete the short sale a relative is willing to loan me money to consolidate the rest if my debt. Can that the bank make me pay them too since it may appear to them that I have no debt,yet I will owe this person a large monthly payment that i will be able to afford to pay them back?
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      If you have a deficiency balance that you are still legally responsible for, then the bank can attempt to make you pay. The bank can sue you to obtain a court judgment against you, working to collect money from you through wage garnishments, bank levies and liens on your property.

      The bank's primary concern is not whether you have more debt, rather whether you have assets which can be used to repay the debt. If you do pay off other debts, then it will appear to the Bank that you have more disposable income and make them less inclined to reach a settlement. You should consider other debt relief options before borrowing money from your relative to pay off debts. It might be wiser to use your relative's money to fund a debt settlement program.
      0 Votes

  • 35x35
    Oct, 2011
    DENISE
    I'm confused, We are getting a full forgiveness for our home equity loan balance of $50,000.0, this is our primary and only home, will we have tax consequences for this canceled debt.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      Full forgiveness from whom? My guess is the lender is forgiving the deficiency balance. However, if a financial institution such as a bank or credit union forgives a debt of more than $600, the institution must issue a 1099-A or 1099-C because this is considered income. The consumer/homeowner/taxpayer must report this using IRS Form 982.

      Consult with a tax preparer or tax lawyer to learn if the Mortgage Forgiveness Debt Relief Act applies in your circumstances.
      0 Votes

  • 35x35
    Oct, 2011
    Tara
    I can't afford my payment on my home anymore. My escrow went up and refinancing will make my payments higher. I am in a ARM that will be up in a year. I live in Oregon and when I got the mortgage in 2007, my parents helped me co-sign to get my 1st home. Will my parents be affected if I foreclose as far as being liable for any taxes? I am still current on my payments but if I stop paying now, when will the Mortgage Co. foreclose on my home? Thx
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      If your parents are only on the loan and not on the title, they may not have liability for the property taxes.

      Oregon foreclosure laws are very complex. Consult with a foreclosure lawyer who can advise you about the available options to avoid foreclosure, such as deed in lieu, mortgage modification, short sale or bankruptcy.

      A separate concern for your parents and you should be whether or not either or both of you will be responsible for any deficiency balance. Some loans in Oregon may be free from any claims for a deficiency balance. Discuss this with the lawyer, too.

      My research indicates that an average time frame would be 180 days before foreclosure, but that does not mean it won't take more or less time.

      If your concern is about your parents owing taxes to the IRS, that will only happen if they have mortgage debt forgiven by the lender. As the home is not their primary residence, the Mortgage Forgiveness Debt Relief Act, I don't believe it will apply to them. They should consult with a tax professional, if any debt is forgiven, to get a professional opinion about whether they can use the IRS Form 982 to avoid paying taxes if any debt is forgiven.
      0 Votes

  • 35x35
    Oct, 2011
    Sharyn
    I bought a condo in VA in 2006 for $235K and lived in it for one year. During that year I got married and my husband is active duty military. He got orders in 2007 and we moved out of state and rented the condo just to make ends meet (never made money off the rental, always lost a few hundred each month). This past Spring (2011) we put it up for a short sale (mortgage been under water since I bought it) for 6mos with only ONE offer and the bank refused it, even though it was a CASH offer. So we did a Deed In Lieu of Foreclosure. Will the Mortgage Debt Relief Act cover me even though the condo is not our principal residence...since we could not live there even if we wanted to due to my husband's military career?? The lender forgave the debt of approx $233K that was left on the mortgage.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      The key issue for you is exactly how the IRS defines "primary residence." When the IRS looks at this issue for capital gains taxation, it uses this test: "... owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its sale..." Some commentators suggest the IRS will use this test when looking at the Mortgage Forgiveness Debt Relief issues and Form 982, but I hasten to say I do not know if it is or is using another test. This bring me to my main point: Consult with a tax lawyer who has experience in the Mortgage Forgiveness Debt Relief Act to get a more precise guess.
      0 Votes

    • 35x35
      Nov, 2011
      Sharyn
      Thank you for your reply and advice. I will certainly consult with a tax expert when the time comes. We had every intention of occupying the property longer than we did (just about 1 year) though my husband received military orders to transfer,which is why we had to move out of state. We wanted to try to sell at that time but were ALREADY $50K underwater so we had to rent (at a loss). Not to make money, but to be able to pay the mortgage while living elsewhere. I am praying that the IRS will take into consideration my husband's active duty status when seeing that we only lived there one year.
      0 Votes

  • 35x35
    Oct, 2011
    Amanda
    Do you know if there is any help out there for our situation? My husband & I have undergone a deed in lieu on our home in GA. We resided in the home and moved in April 2007. We had to move to NJ for my husband's job & rented out the home at the end of 2007 after trying to sell it. We bought a home here in NJ hoping renting out the GA home would take care of most of the mortgage. 3 tenents lived in it, destroying property, not paying, etc. We never got enough $ to even cover the mortgage...clearly not an investment property and it never was intended to be...just trying to ride out the failing market. Long story short, we lost the home to a deed in lieu a few months ago. Is there any hope for us for when we file our taxes next year? We hardly have enough $ to pay our current bills, and I can't imagine how we would pay the IRS when we file. Also, do you know the percentage we would have to pay assuming there is no hope? Please help advise as I don't know where to turn. Thanks.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      Speak with a tax professional to see if you maintained primary residence in the GA property for enough time to benefit from the MFDRA. If not, inquire into the IRS From 982, which could release you from any need to declare as income the amount of debt forgiven by your lender.

      If you are have to declare the amount of debt forgiven as income, you will be taxed at the rate of the tax bracket in which you fall.
      0 Votes

  • 35x35
    Oct, 2011
    blanca
    If my home is in foreclosure can I apply for this act?
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      The MFDRA applies to the tax obligation for forgiven debt arising from a short-sale, deed-in-lieu of foreclosure, or foreclosure. If none of your debt has been forgiven, at this point, the provisions of the MFDRA don't apply to you.
      0 Votes

    • 35x35
      Oct, 2011
      peggy
      in foreclosure there is not a definancy judgement does it qualify me for this 982 i am forgiven about 60000 in foreclosure 2nd home but my sons who is on deed
      0 Votes

    • 35x35
      Oct, 2011
      Bill
      I am confused by the facts you shared in your message. Whether there is a deficiency judgment does not determine if a taxpayer should file an IRS Form 982 or if there is potential tax liability. File a Form 982 to indicate the amount of debt forgiven or canceled, regardless if the lender issues a 1099-A or 1099-C. Consult with a tax preparation specialist or tax lawyer to learn more about your potential tax liability for the canceled or forgiven debt.
      0 Votes

  • 35x35
    Oct, 2011
    Sharon
    We purchased our new home in March 2011 and moved in at the end of April. We wanted to rent out the condo we haved owned since 2003. That proved impossible so we had to short sale the property. Escrow closes at the end of October. Since we technically moved out of the condo and moved into the new property are we still able to claim the condo as a primary residence? It was never rented out and was listed for sale prior to our moving out.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      I don't believe there is a definitive answer to your question. Some experts think that the IRS will apply the same residency requirements for receiving protections of the Mortgage Forgiveness Debt Relief Act (MFDRA) that is applied to determining capital gains tax responsibility. As the IRS states, regarding capital gains taxes, "if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its sale," then you are eligible for the tax exclusion.

      It is my opinion that you will be able to benefit from the protections of the MFDRA, but I am can't give you tax advice. Your best course is to speak with an experienced tax professional, preferably someone who has researched and developed a strategy about this issue.
      0 Votes

  • 35x35
    Oct, 2011
    David
    I am currently going through a short sale for my house in Illinois. This was my primary residence until May 2011 and then i had to relocate to accept a new job in Florida. We bought a new house in Florida in May. Once the short sale completes on my house in Illinois (2-3 months from now), will i be eligible for the Mortgage Forgiveness Debt Relief Act since the property in Florida is now my primary residence, not the property in Illinois?
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      Details in your situation are critical. Did you rent the Illinois home to tenants and report this activity on your tax return? Did you initiate the sale of the property when you vacated it?

      If the answer to my first question is "yes," then it is likely the IRS will view the Illinois property as an investment, and not as a primary residence. However, if the answer is "no," then we go to my second question. If the answer to my second question is "yes," then it is clear you sought to dispose of this property as soon as you vacated it. It was not an investment or vacation property, you resided in the property, which makes it your primary residence up until the moment you moved and (perhaps) placed it on the market..

      Above is an argument I created in favor of the Mortgage Forgiveness Debt Relief Act applying. However, I added facts that may not be true. Consult with a lawyer who has tax experience who can analyze your situation in detail, and advise you accordingly.
      0 Votes

  • 35x35
    Sep, 2011
    Diane
    Hello we purchased our home in 2004 for 440k in CA. We took out a HELOC for $50k in 2006, we unfortunately have a ARM and our current loan balance with the 1st & 2nd is now $550.00, our home is only worth $299 and needs some repairs. We just received a notice from our 2nd that they increase our interest rate from 2% to 9% and our 1st increase 2% as well. They are now asking for an additional $600 per month. We are currently living paycheck to paycheck and have not been late on any payment. However wil cannot pay an additional $600 a month. We have contacted our lender and we were told we do not qualify for a remodification loan until our mortgage payment hits over 30% of our monthly income. Our loan is scheduled to increase again next year. We are soooo underwater and our lenders aren't willing to work with us at this time and said the until we are behind one or two payment they will take a look at it but don't feel we qualify for a remod. We truely will not be able to make the new payment. I want to know if we try to negotiate with our second and then have to short sale our home, other then taking a hit to our credit is there anything else that can happen and would be qualify under The Mortgage Forgiveness Debt Relief Act and Debt Cancellation even thought for about 2 months we would be able to pay the additional $600 but after that we would not be able to do it?
    0 Votes

  • 35x35
    Sep, 2011
    Becky
    I am in a terrible situation. My husband bought a house in a "bad" neighborhood before he met me. he meant to flip it and then make some money, back in 2007. well, obviously the market is not the right time for it, but now we have a son and we don't want to raise him in this kind of neighborhood. Houses around us are selling for 9k, 15k, 30k.....but we still have 83k on our mortgage. we have a realtor involved who told the bank she wanted to post this house to sell, so she wants to sell it at 25k, the bank said no way. so we posted it where the bank said, at 79k and, obviously, we got no replies. not even a blink, for 30 days. so we dropped it again, where the bank said to, at 69k. still nothing. however, we already got an apartment and are moving in, in a week. if we can't sell it, which we can't if the bank won't post it at 25k and we told the bank that we already have a buyer for 25k (which we honestly do). we want to try and do a deed in lieu and if not that, then foreclose. but, i was not aware that they could come after us for the rest of the money or tax liabilities. i never heard of anyone be liable for tax liabilities for any of that. could that happen to us??
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      From what you describe, there will be no taxes due, even if the mortgage balance is forgiven. I can't give you tax advice, only a tax professional can do so. You should speak with a tax professional to fully understand any potential tax liabilities.

      Whether the lender can pursue you for any remaining balance on your mortgage, after the home is sold for less than what you owe, depends on whether you are in a recourse or non-recourse state. Also, whether the mortgage was ever refinanced can make a difference in some states. Consult with an attorney who can review your loan documents and advise you accordingly.
      0 Votes

  • 35x35
    Sep, 2011
    melba
    Bills.com--- I love reading information on your site. Really helps. I am in a very bad situation. I have a finacial hardhip, I have recently gone through a divorce. I decided to stay in the maritial home( purchased Nov. 2002) 150+k market was great for a number of years. The value increased to 185+k and now ,as you know, it has tanked. I was advied by the courts to do one of two things(1) sell my house within 2yrs (2) refinance in to remove my ex- husband from the mortgage. I chose to stay and refinance. My home was appraised at 160K. The current value of my home after is 79K. After the Re-fi in May 2010 Every dollar I make goes right back out the door to pay my mortgage, bills and feed my two children. My checkbook is most times in the negative. I have contacted my bank Wellsfargo about a loan modification. My property is in Georgia. If I short sell my property will Irs come after me? Is Georgia a debt forgiveness State? Thanks-
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      Georgia allows deficiency judgments if the lender proves it sold the property at fair market value. If the comps in your neighborhood are, as you suggest, $79,000 and the balance of the loan is $160,000, then you face a signficant deficiency balance. If the lender cancels the debt, then you would have the imputed income issue. However, as is discussed on this page, the Mortgage Forgiveness Debt Relief Act handles this. On the other hand, if the lender seeks to collect the deficiency, then you have liability if it can prove it sold the property in a foreclosure sale at the market price.

      Consult with a Georgia lawyer who has bankruptcy experience to learn your options for resolving the debt, should you choose to allow a short sale or foreclosure.
      0 Votes

  • 35x35
    Sep, 2011
    Joe
    Bills.com- Love reading your site. Helps a ton. We are in a bad situation, purchased a home in Oct. 2009 for 300K. Value has tanked to $200K. We still have jobs, but no assets at all. I have a small home owned by my parents that we are considering moving to. Every penny we make goes right back out the door to pay bills and the mortgage. I am balancing my checkbook down to $25 between paychecks. Property is in Georgia. What happens if we let it go into foreclosure? Will the bank come after me for a balance? What are the tax issues? Can they do both?
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      Georgia is what is called a 'recourse state.' That means the lender has the right to come after you for any deficiency balance, the difference between what you owe and what the home sells for.

      You should try to negotiate a short sale and see if the lender will forgive the balance. It it forgives debt, you may be able to use the Mortgage Debt Forgiveness Relief Act to avoid declaring the forgiven debt as income, if your home meets the rules specified in the act.

      If the creditor chooses to not forgive the debt, you can try to negotiate a settlement or see if you can discharge the debt via bankruptcy, if you qualify for one. If neither of those options is viable, the debt could lead to a suit, a judgment, and wage levies.
      0 Votes

  • 35x35
    Sep, 2011
    Jeff
    Hi, i purchased a 1bd condo in 2005 and lived in it till december of 2009. My wife and i bought another house in 2009 because we had a kid on the way. We tried to short sale the condo for almost three years and had no success. Now they just foreclosed on the condo and i'm worried about whether i'm gonna get 1099'd or if the bank is gonna come after me for the debt. Could i still count the condo as my primary residence even though i haven't lived in it for a couple years?
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      I do not see a compelling argument in favor of a property you have not resided in for almost three years being your primary residence, especially if you bought another property and resided there.
      0 Votes

  • 35x35
    Sep, 2011
    ant
    I took out a equity loan on my primary to purchase two investment properties a duplex and single family house. Problem despite making $10,000 down payments and high credit ratings I accepted ARM financing, which later doubled the payments from 600 plus to 1200 month. Now in foreclosure, can I use the mortgage forgiveness program? Can I walk away from the mortgage balance if a short sale is made? The bank has turned down 4 offers so far. Is foreclosure the best solution to these bad business investment?
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      Consult with a lawyer who has bankruptcy experience to learn if a foreclosure-bankruptcy combination will address your financial and legal situation.

      The Mortgage Forgiveness Debt Relief Act allows taxpayers to exclude income from the discharge of debt on their principal residence. Investment properties do not qualify.
      0 Votes

  • 35x35
    Aug, 2011
    george
    Hello Bill, i am a resident of CA and I did loan modification end of 2009. I had a 2 part loan(80% & 20%) with Aurora Loan Services. During the processes of the loan modification I was over a yr behind on my payments(due to the heavy volume of people they kept having me wait). During the process I thought I asked specific questions because I new there were 2 seperate loans and the amount of money I was behind on my payments. They kept telling me everything would be taken care of that I just needed to do the 3 month trial period(which I did) and fill out the final paperwork. Don't quote me but I believe they mentioned that the small loan would be considered a write off but that the unpaid payments would be added to the loan over a 35 year fixed rate of 2%(freddie Mac rate). I rememebr asking about the small loan and if it could come back to haunt me and they assured me it was good to go that I had no worries. Well it seems like it has come back to haunt me almost 2 years later, because I received a letter in the mail from collection agency wanting payment on the similiar amount of the small loan. Since I completed my loan modification I have not been late on any payments so this is very surprising... I already called and notified Aurora but it will probably take them at least 30 days to handle my situation. I guess my question is can the Aurora do this? Or what legal action or rights do I have to protect myself?
    0 Votes

    • 35x35
      Aug, 2011
      Bill
      Bring your original loan documents and the modification contract to a lawyer who has foreclosure or real property experience. He or she will review the modification contract and explain what rights and liabilities you may have for the junior loan.
      0 Votes

  • 35x35
    Aug, 2011
    Miriam
    Just a question. I purchased a home in 2005 for 900K with a 50K down payment. I was my principal residence for 1 year, the i moved away and my parents stayed in it for 3 years. After living in Mi for 2 years we came back and now we have resumed living at this house. IN July 2010 we got an offer for debt forgiveness from our bank due to a reduction in the FMV of our property. The original loan has been reduced by 250K, leaving our mortgage at 600k. As of april 2011 we did do our taxes and included the debt reduction) At the time of the modification this was (and still is our priniciple residence) but my husband an i would like to purchase another home here in CA to use as either a rental or a second home for us. Are we at risk of getting audited or taxed for that forgiveness?
    0 Votes

    • 35x35
      Aug, 2011
      Bill
      Given the size of the forgiveness and the potential tax liability resulting from it, you need to ask an experienced tax professional your question. Find out if you should amend your return or if the fact that you were accurate on your return and met the requirements for primary residence at the time your debt was forgiven means that the issue is moot. As an aside, were you told that you met the primary residence requirements by a tax pro?
      0 Votes

  • 35x35
    Aug, 2011
    Roger
    Hi Bills.com, I had 2 mortgages on my principal residence - 1)$355K and 2) HELOC, $125K. Both debts were recently discharged from a CH7 BK (NO REAFFIRMATION). My home value is $275 which is about $200K underwater. I'm currently on a HAMP Trial Payment Plan which can lead to a permanent modification. Assuming that I accept the permanent mod offer and continue to make this voluntary mortgage payment, do I still qualify for the tax-free relief if I walk away in 2013?
    0 Votes

    • 35x35
      Aug, 2011
      Bill
      My guess — note that word choice — is no based on the facts you provided and the law as it is written as I write these words today. However, Congress has plenty of time to extend the act.
      0 Votes

  • 35x35
    Jul, 2011
    Todd
    Hi Bill.com I purchased a home in July 2007. Left home in Aug 2010 for marriage sep, paid bank loan on house until Oct/Nov 2010. Divorce final 1 July 2011, ex still lives in house, never paid anything, now recvd notice from NAVY FEDERAL CREDIT UNION via Lawyer stating house will be foreclosed and up for Sherriffs sale. Letter was dated 1 July and I recvd 29 July via courrier... I live in Indiana now and the house is in Fargo, North Dakota went through floods in 1997 before I moved there, 2009, 2010, 2011. in 2009 they bought ut 3 houses in my neighborhood north of fargo outside city limits, but due to my work effort I saved my house, looking back I should have let it flood. We purchased the home for 192K and now the bank wants 197K or ELSE. we had the home morgage down to 182,000 in Oct 2010. NAVY FEDERAL CREDIT UNION IS A sneaky bank and only cares about money and not the person in the home. Any advice? Just to add I am a retired disabled vet with NO job and my ex gets half of my retirement. thank you for your help and any help from the posters and readers.
    0 Votes

    • 35x35
      Aug, 2011
      Bill
      I assume difference between the October 2010 balance of $182,000 and today's balance of $197,000 is due to payments missed and penalties. If you are not clear on how the balance grew so quickly in a relatively short period, ask your lender for a statement. If it is still not clear, consult wtih an attorney.

      See the Bills.com resource Short Sale Topics page.
      0 Votes

  • 35x35
    Jul, 2011
    Ann
    Hi Bill, my question is a bit complicated so I hope you can help me. I along with boyfriend purchased a $170K brand new home in GA. We qualified using my credit, his income, and my name is on the loan however his name is on the deed. Unfortunately we broke up and he moved out leaving me with paying the mortgage. The mortgage hasn't been paid for over a year and I have no income and gotten no where with modifcation. I want to walk away from the home and move back with parents. Am I'm covered by mortgage foregiviness act, what are tax implications, should I apply for deed in liue of foreclosure. PLEASE HELP
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      I can't give you legal or tax advice, but will share a few thoughts.

      If the mortgage was all used for purchase and the home is your primary residence, you should be eligible for the Mortgage Forgiveness Debt Relief Act, shielding you from the tax obligations. However, I suggest that you speak with a tax professional to make sure.

      Georgia is a recourse state, so the lender can come after you for any deficiency balance that remains after a short sale or a foreclosure. I think you should speak with an attorney that has experience in negotiating with lenders to see if you can reach an agreement to sell the home for less than you owe and have the lender agree to not pursue the deficiency balance.
      0 Votes

  • 35x35
    Jul, 2011
    Jason
    Hello, My wife and I live in Nevada and lost our home to foreclosure a year ago. We filled out a 1099 for our first mortgage but were not sent one for the second but our tax guy filled a seperate form out that he said covers us. We just received a collection notice from our second mortgage company and they appear to be coming after us. We discussed with a lawyer and they told us to file bankruptcy. We feel we have more to lose by filing chapter 13 then gain. Is success acheived typically by offering let's say 10 cents on the dollar to this second mortgage company? Do they still have a case to get the full payment of the loan considering it was sold from US bank to Countrywide and is now held by B of A? I understand when they sell the loan they usually sell it cheaper then the full amount? Really needing some advice from somebody who doesn't just want my money and not what is best for my family!
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      My guess — note that word choice — is that all of the horse trading for the second occurred before your foreclosure. If that is the case, then you do not have a debt collector type of situation where the collector buys a collection account from the original creditor for a small fraction of the original balance. In those types of situations, it is easy to settle the debt for a fraction of the original balance.

      In a foreclosure situation, you can still negotiate with the mortgage servicer for less than the full balance. According the Bills.com readers I have corresponded with, they have negotiated seconds for about 15 cents on the dollar. However, each reader's situation is different, and if you can demonstrate a weak financial position, you will almost certainly be able to reach a better settlement.
      0 Votes

  • 35x35
    Jul, 2011
    Joe
    Bought an investment condo in 2007 that is worth 90,000 and the balance is 205,000. After all bills it loses $800 per month after the rent payment. I have good credit and assets but want this off my plate without losing all my savings. I am current on the loan but this home is never coming back in value and is a huge loser each month. What is the long term variance between a short sale, DIL of foreclosure, or foreclosure?
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      The devil is in the details. A mortgage servicer may offer you an excellent deed-in-lieu-of-foreclosure or a terrible short sale contract, or vice-versa. Take whatever contract you are offered to a lawyer who has experience in contract law to learn the positives and negatives of the contract before you.
      0 Votes

  • 35x35
    Jul, 2011
    Tim
    How is "Principal Residence" Defined by the law. I bought the house I'm foreclosing on in 2007 and lived there since 2009, then rented from 2009-2011 b/c I could not sell. Would this property be considered a principal residence?
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      Please see the discussion of this issue dated May 25, 2011 on this page.
      0 Votes

  • 35x35
    Jul, 2011
    Jerome
    Hi, I moved out of my home about 2 months ago. I could not continue to make my payments due to the loan adjusting. I spoke with my mortgage company about doing a deed in lieu instead of a foreclosure and they told me about the 1099 etc. My only question is I brought the house for 144, 000 and I believe is is may worth half of that now. For instance if they accept it for $50,000 will I have to pay the remaining $94,000 and if so will I be able to seek assistance from the Mortgage Forgiveness Debt Relief Act? I purchased my home in June 2007.
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      For the sake of argument, let us say you and the bank agree to a short sale or deed-in-lieu-of-foreclosure, and the property eventually sells for $50,000. Let us say the balance of the loan is $140,000, and no where in the contract is the deficiency balance discussed. In that case, you would owe the lender $90,000. Let us say the lender throws up its hands and says, "We know we can't get that much from you, so we are going to forgive the deficiency balance, cancel the debt, and issue a 1099-C for the $90,000." Normally, the $90,000 would be considered income to you. However, this is where the Mortgage Forgiveness Debt Relief Act steps in, and in effect says, "forgiven debt relating to a mortgage loan is not considered taxable income." Obviously, the act is much more complicated than that one sentence, but my summary is useful for the purposes of our discussion.

      The Mortgage Forgiveness Debt Relief Act is not a grant or loan program. It does not provide payment to mortgage servicers for deficiency balances.
      0 Votes

  • 35x35
    Jul, 2011
    Tim
    The language of the act states it is valid for calendar years 2007 through 2012. Does that mean I need the debt forgiven by 12/31/2011 or 12/31/2012 to qualify (given all the other criteria is satisfied)?
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      My reading is that the debt must be forgiven by 12/31/12. However, any time a person is facing a situation with large tax implications, I recommend that person speak with a tax professional, in order to get an authoritative answer. Therefore, I suggest you speak to a tax pro, so you can take the right steps to minimize your tax exposure.
      0 Votes

  • 35x35
    Jun, 2011
    Abigail
    I live in Florida and my situation is this: I purchased my home 12/2007 for 82,500. I was given $10,000 in grant money for being a first time home buyer. My current mortgage with USBank is for $72,000 and I would have to pay back $4,000 of the $10,000 if I sell the house. Similar homes in my neighborhood are selling for around $30,000. I need to find out if a short sale, deed in lieu or foreclosure is the right option for me. I am unemployed and 2 months behind on my mortgage at this time. I have some place to move to that will fit my budget but I would like to stay in my home for a few more months so I can sell 95% of what I own because I will be downsizing into an efficiency apartment. I am willing to foreclose and file chapter 7 bankruptcy if necessary but I don't want to if I don't have to. I was worried about deed in lieu or short sale only because of having to pay income taxes on the forgiven debt. How can I find out for sure if I would qualify for the debt relief/cancelation? I'm not in foreclosure yet but I wanted to find out if the mortgage company halts foreclosing while I have my home on the market. Is it reasonable to assume that a mortgage company might allow a short sale for around $30,000 when my mortgage is $72,000? Or is that to much of a difference?
    0 Votes

    • 35x35
      Jun, 2011
      Bill
      If the home is the taxpayer's primary residence, the Mortgage Forgiveness debt relief act almost certainly applies. Regarding your question about the amount of the short sale, pay close attention to the contract for the short sale or deed-in-lieu of foreclosure. In some instances, the lender will forgive the deficiency balance (if state law allows the collection of deficiency balances). In others, the homeowner has liability for the deficiency. There are no hard-and-fast rules. You mentioned a willingness to file for bankruptcy. Consult with a bankruptcy lawyer sooner rather than later to learn if you qualify for chapter 7.
      0 Votes

  • 35x35
    Jun, 2011
    Michael
    I noticed in an earlier comment, you said you could not find info on whether New York State had a comparable law to the debt forgiveness act. Is there a way to get this information? Do states usually follow Federal guidlines in situations like this?
    0 Votes

    • 35x35
      Jun, 2011
      Bill
      States are sovereign; they can set stricter laws than those set by the US Congress. For example, New York and California have stricter consumer protection laws than the federal laws. California's emissions standards are stricter than federal standards. Regarding mortgage debt forgiveness, I was unable to find a New York law comparable to the federal or California's. Contact your elected state representatives to see if their offices can assist you.
      0 Votes

    • 35x35
      Jun, 2011
      Marc
      We purchased a home in Canton, GA in February 2007. We were relocated to Tampa, FL March 2009 where we are currently renting a home. We are in the process of short selling our home in Canton. Do we qualify for the Mortgage Debt Relief Act? Thanks
      0 Votes

    • 35x35
      Jun, 2011
      Bill
      Maybe. The IRS rules on this matter are not crystal clear. Consult with a tax lawyer or tax preparation specialist who will analyze your situation in more detail than you provided in your question.
      0 Votes

  • 35x35
    May, 2011
    Ryan
    I have done a lot of research in finding out what all this relief stuff is. Every website that I go to offers mortgage debt relief but isn't specific like I notice that you actually take the time to answer specific questions
    0 Votes

  • 35x35
    May, 2011
    Susan
    Like so many, I'm shortselling a very underwater condo that WAS my primary residence ($187,000 remaining on mortgage, short sale valuation is $43,000). In some places in the tax code, the requirements for qualified primary residence are 2 years occupancy within the 5 years prior to sale. I am "hoping" The Mortgage Forgiveness Debt Relief Act accepts that same definition. Here is reference to info on that definition: Title 26, Subtitle A, Chapter 1, Subchapter B, Part III, ยง 121. Exclusion of gain from sale of principal residence. Can you comment on this, please. Thanks!
    0 Votes

    • 35x35
      May, 2011
      Bill
      My research indicates that there is no definitive answer to your question about the Mortgage Forgiveness Debt Relief Act. It appears that there are strong grounds use the Section 121 argument that you cited, that uses the 'maintained as primary residence for 2 out of the last 5 years' rule for defining a primary residence.

      While that argument seems reasonable, it is not clear how the IRS is going to respond to it. The best advice I can give you is to meet with an experienced tax professional or CPA. Any time there is a question with potentially serious tax consequences, it merits asking a competent professional.
      0 Votes

  • 35x35
    May, 2011
    Cory
    I bought a home (2004) in Arizona to be built. Planned on selling our current Arizona home and move into the newly built home. I was forced to transfer to California in 2005 for work and sold our primary residence and moved to California. When the other Arizona home was finally finished being built we were living in California. Tried to sell it but could not because the market turned. I refinanced it as a second home and want to short sale the home now. If Arizona is a non-recourse state can the lender come after me for the debt or do I just have to pay the difference as tax income. My biggest concern is the lender coming after my other assets.
    0 Votes

    • 35x35
      May, 2011
      Bill
      Consult with a Arizona lawyer who has experience in real estate law to learn about your liability for a deficiency balance relating to a Arizona foreclosure or short sale. See the Bills.com resource Arizona Collection Laws, and in particular the discussion on Arizona foreclosure and code section 33-814. I do not believe Arizona's anti-deficiency rules apply to you in your situation because you did not reside in the property for the last two years. However, consult with an Arizona lawyer for a more in-depth analysis.

      You mentioned you are a California resident. For a brief overview of your liability for a deficiency balance, see the Bills.com resource California Collection Laws.
      0 Votes

  • 35x35
    May, 2011
    George
    II am cosigner on my daughter's mortgage. She's short-selling. She qualifies for federal mortgage debt relief act. What about me?
    0 Votes

    • 35x35
      May, 2011
      Bill
      If you are a co-borrower, then you may receive a 1099-A or a 1099-C. However, if you are merely a guarantor, then you should not receive a 1099-A or 1099-C. Review the contract you signed at mortgage closing to learn your exact status.

      As a separate issue, the Mortgage Forgiveness Debt Relief Act of 2007 applies to residents of the property. It is unclear from the facts provided if you resided in the property in question. If so, then the act applies to you, and if not, then the act does not apply to you. See Publication 4681 to learn more.
      0 Votes

  • 35x35
    Apr, 2011
    Robert
    My wife and I purchased a second home for retirement in Lake Havasu Arizona in 2005. Since then I was laid off twice, my wife took a 10 percent pay cut and the house is 160,000.00 underwater. We can longer keep up with the $2300.00 monthly payments. I understand the Arizona is a non-recourse state. I understand the state cannot come after us on the deficiency; however, can the IRS come after us if we short sale or deed in lieu of?
    0 Votes

  • 35x35
    Apr, 2011
    John
    I put my house up for sale 3 years ago, it didn't sale, to make payments I moved in with friends and rented it to make the payments. It still didn't sale. Renters moved out a year ago and I stopped making payments...we are looking at either dedd-in-lieu or short sale but will I be able to use the Mortgage Forgiveness Act as long as I close it out this year or next? Thank You
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      Today? No, the The Mortgage Forgiveness Debt Relief Act does not apply to you because you indicated the property in question is not your principal residence. However, if you relocated to your property and made it your principal residence, then The Mortgage Forgiveness Debt Relief Act would apply because it is your principal residence.
      0 Votes

  • 35x35
    Apr, 2011
    Amy
    We have a related question as well. My husband is active duty military. The home that we are in a current short sale/deed in lieu negotiation on was our primary residence until the military gave my husband orders to transfer out of state. We all moved with him. Will the Mortgage Forgiveness Debt Relief Act still apply? Thanks so much- Amy
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      Depends on your circumstances. Unfortunately, the Mortgage Forgiveness Debt Relief Act is unclear on how it applies in situation you described. If, for example, you moved from the house in question into military housing, and the house was vacant, then I would argue the house is still your primary residence. However, if you rented the house and reported the income on a Schedule C or E, then it is tough for you to argue that the Mortgage Forgiveness Debt Relief Act applies to you. Consult with a tax preparer or tax attorney, who will analyze your situation in detail.
      0 Votes

  • 35x35
    Apr, 2011
    Dale
    I currently own a home in Virginia that we purchased in 2003. Due to work reasons we no live overseas (not military) and have had renters in our Virginia home for the last three years. Our drivers license information still has that home as our address and Virginia is where we file our State tax returns. Would we qualify for the MFDR?
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      The answer depends on circumstances you did not include in your message. Are you non-US nationals on a "permanent" assignment at one fixed location? Or, to pick an opposite extreme, are you US nationals free-lancing where you move from location to location? Consult with a Virginia lawyer who has experience in tax law, and can interview you about your intentions, places you lived after you departed the US, and so on.
      0 Votes

  • 35x35
    Mar, 2011
    Alex
    My partner and I completed a short sale in 2010 which will put $380,000 on a 1099-C. The debt was joint between my partner and I, and we are filing separate returns. My partner lived in the house as his primary residence, however, I did not. Could he write off 100% of the cancelled debt on his return using the Mortgage Forgiveness Act?
    0 Votes

    • 35x35
      Mar, 2011
      Bill
      I am reluctant to offer yes/no tax answers because readers almost always have relevant circumstances they do not share in their comments that, if disclosed, would change my answer. Based only on what you shared, the answer to your question is yes, the owner-occupant qualifies for the Mortgage Forgiveness Debt Relief Act. See IRS Publication 4681 for more information. Consult with a tax preparation professional who can review the taxpayer's entire financial picture, and give precise advice based on the circumstances.
      0 Votes

    • 35x35
      Mar, 2011
      Alex
      My partner and I were co-borrowers on a loan. We short sold the house, and have a 1099-C. The 1099-C only lists myself (the primary borrower) on the form. Would my partner need to file the 1099-C since he is not listed on the form, but it a co-borrower?
      0 Votes

    • 35x35
      Mar, 2011
      Bill
      Contact your lender and ask it to issue a corrected Form 1099-C that includes the names and Social Security numbers of both signatories on the canceled debt.
      0 Votes

  • 35x35
    Mar, 2011
    Jeff
    Hello, I own a condo in CA since 2005 in which was purchase as my primary residence. In 2009 I was relocated for work, and purchased a second home. While trying to sell the Condo I rented it out in order to cover some of the expenses. In 2010 I was laid off and could no longer afford to cover the mortgage on Condo which is going to foreclosure. Per a tax attorney because it was purchased as my primary residence under CA law it still qualifies as such. Does CA law mirror Federal law with regards to Debt Forgiveness Act as the condo still being considered Primary because of it intended use?
    1 Votes

    • 35x35
      Mar, 2011
      Bill
      See the California Franchise Tax Board document Mortgage Forgiveness Debt Relief Extended to learn more about California's version of the federal Mortgage Forgiveness Debt Relief Act. Consult with your tax attorney to learn of your property also qualifies under California's rules.
      0 Votes

  • 35x35
    Feb, 2011
    Dexter
    All this Debt Relief Act is very confusing ... my wife and I bought our home back in 1985 ... refinanced in 2006 to pay kids college costs ... lost my job in 2008 and now we're broke. The bank foreclosed with a sheriff's sale notification and we've decided to not try to redeem the home but live elsewhere instead (with our son). My wife and I each received a 1099-A form from the bank showing the balance of principal outstanding and the current FMV (which seems to be way overstated in this econ). All the IRS Pub 4681 talks about is a 1099-C form for the data. How and what do I report on my income tax???
    0 Votes

    • 35x35
      Feb, 2011
      Bill
      You need to review, and probably submit, a completed IRS Form 982. Consult with a tax preparation professional if you need help completing your taxes.
      0 Votes

  • 35x35
    Feb, 2011
    Jennifer
    My husband and I bought a home in October 2009. I moved out of the home in July 2010 as we are getting a divorce. We now are doing a short sale and I am wondering if when I do my 2011 taxes, will I have to pay taxes on the 1099-C or can it be included in the Debt Relief Act?
    0 Votes

    • 35x35
      Feb, 2011
      Bill
      If you get the wrong answer to your tax question, you could suffer serious financial implications. The Mortgage Forgiveness Debt Relief Act of 2007 permits a homeowner to exclude from taxation 'income' that is derived as a result of a loan modification, foreclosure, or short sale. I think the key issue may be whether the home would meet the test of being your primary residence, which is necessary to claim the benefits of the Mortgage Forgiveness Debt Relief Act of 2007.

      I strongly recommend that you speak with a tax professional. Even though the short sale will take place in 2011 and will not be something you need to deal with until the 2011 taxes are due in 2012, I think that you should speak with someone ASAP. That way, you will know what you will face next year and can plan accordingly. Remember to ask the tax professional about the IRS Form 982, which can be used to legally avoid declaring forgiven debt as income, if you meet the IRS' terms for insolvency.
      0 Votes

  • 35x35
    Feb, 2011
    George
    Purchased a homein 2005, Took a second in 2007. Relocated for employment, triewd Deed in Leiu, declined. Tried Short sale, but it too was declined. Looking at Chapter 7. Owe $260K 1st, $40k second. House current value is ~$170k. How does the MFDRA effect me?
    0 Votes

    • 35x35
      Feb, 2011
      Bill
      Assuming for the sake of argument the two mortgagees foreclose and your house is auctioned for its market value of $170,000. You mentioned the balances of your loans are $300,000 (260+40). For the moment, we will assume the 2007 second mortgage was used to improve the property (i.e., new roof, add a room, remodel the kitchen, landscape, etc.) The deficiency is a $130,000, assuming zero costs for sales, legal fees, and so on. Let us also assume the two mortgagees cancel the debt and issue 1099-Cs totaling $130,000. The Mortgage Forgiveness Debt Relief Act negates the taxes you would otherwise have to pay on the $130,000 "income" related to the 1099-Cs and the canceled deficiency balance.

      However, if the second was not used to improve the property, then the second is not subject to the Mortgage Forgiveness Debt Relief Act.
      0 Votes

  • 35x35
    Dec, 2010
    Mike
    I currenly own a condo in CA that is worth $350K & we owe $396k on a 1st and 72,500 on a 2nd. I qualified for a 2nd home which we plan to move into and then rent our current condo. I always like to plan for the worst of events. So, what would happen if we can't get it rented and either have to short sale or foreclose on our condo because we can't afford both payments? We won't move into our new home until aug of 2011 so our condo would be our primary residence until then. If we can't get it rented then I would consider looking into shorting or foreclosing in sept/oct 2011. Are there tax consequences or would this case fall into the mortgage debt relief act?
    0 Votes

    • 35x35
      Dec, 2010
      If you can argue that the condo is still your primary residence, then the Mortgage Forgiveness Debt Relief Act applies to you. However, if it is clear the condo is not, then the Mortgage Forgiveness Debt Relief Act does not apply. The question comes down to this: Is the condo in a desirable location with amenities that make it attractive to prospective tenants? Will the amount of rent you can reasonably expect make you cash-flow neutral of positive. Do some research on Craigslist and other rental marketplaces to learn what to expect in rental income.
      0 Votes

  • 35x35
    Dec, 2010
    Hector
    Hi, I have a specific question regarding the TAX on the forgiveness of debt from a short sale if the property happens to be a \"Duplex.\" WAIT!! before responding, please avoid being vague as many so called Tax Professional and Tax Advisor are. Some just go by saying that \"they don\'t find an indication a where the tax code would disqualify the Duplex from the MFDRA\" and some simply limit their answer by answering to saying that if it was their primary residence, then no TAX. Obvious, we know that...!!
    0 Votes

    • 35x35
      Dec, 2010
      You are asking for a yes or no answer. However, the tax code is vague regarding duplex, triplex, etc. residences, and the answer will depend on your exact facts and circumstances. If the other half of the duplex was vacant over the last year or so, then the answer to your question is clear. If you rented the other half of the duplex and filed a Schedule C or E to report the rental income, then the answer to your question is more complex. Bite the bullet and hire a tax lawyer to research your question, and get a precise answer based on your exact circumstances.
      0 Votes

  • 35x35
    Nov, 2010
    Lori
    We are in Sparks, NV - our primary residence is currently going thru' a short-sale and projected closing will be in December. Already been approved for HAFA. Do we qualify for the Mortgage Debt Relief Act of 2007 for the deficency of the loan? and if so - what additional steps should/can I take to ensure we don't get 1099c? Thank you.
    0 Votes

    • 35x35
      Nov, 2010
      Bill
      There is nothing you can do to prevent the mortgagee (the mortgage lender) from issuing a 1099-C if it cancels the debt. Federal law is clear and precise on this matter. The 1099-C is a symptom and not the disease. The cure to the forgiven debt income is found in the Mortgage Forgiveness Debt Relief Act discussed above.
      0 Votes

  • 35x35
    Oct, 2010
    Amanda
    I purchased my home (in CO) in Sept 2007 and by 2009 I was out of a job and defaulting on my loan. After a year and a half of trying the short-sale process, I called the mortgage company as a last ditch effort to see if there were any other options. They offered to do a DIL but my house is going to auction in 30 days. I'm trying to understand what all of this means in a short amount of time. So if the fair market value is $195k and I owe $220k, will the lender forgive the $25k under the MFDR? And if they do, will I still owe taxes on the $25k? Would a 982 Form help get relief on the taxes?
    0 Votes

    • 35x35
      Oct, 2010
      Bill
      Review the deed-in-lieu of foreclosure contract to determine if you have liability for the deficiency balance. Some mortgagees write contracts where the mortgagor (borrower) is liable for the deficiency balance and others do not. Take the contract to an attorney who has experience in contract or property law to understand the terms. Regarding the Mortgage Forgiveness Debt Relief Act, see IRS document The Mortgage Forgiveness Debt Relief Act and Debt Cancellation for details.
      0 Votes

  • 35x35
    Oct, 2010
    Lee
    I wanted to know, I purchased a 2nd home (condo) in 2004 for $160,000. Lost income, ect. Now facing short sale or Deed in-lieu, now realtor says value is more like $50,000. When we purchase appraiser said in one year it would be worth around $180,000. Will I be taxed on the difference of the real value and how much it sold or what it sold for and what I owe. This seems wrong that the market dropped so much and I could be taxed on all of it.
    0 Votes

    • 35x35
      Oct, 2010
      Bill
      The purchase price and the expected market value of the property are irrelevant. What is relevant is the balance of the loan at the time of the foreclosure auction or short sale minus the sales price. I will make up numbers here for the sake of argument: Let us say the balance of your mortgage is $100,000 and the condo sells for $60,000. If the mortgagee forgives the $40,000 deficiency balance and reports it to the IRS using a 1099-C, then you have an imputed income of $40,000, which is taxable.
      0 Votes

  • 35x35
    Aug, 2010
    Bill
    Assuming you receive a 1099C indicating the deficiency balance is forgiven, you will not be taxed on the forgiven amount. Please see Please see the California Franchise Tax Board document Mortgage Forgiveness Debt Relief Extended and the original answer above for details.
    0 Votes

  • 35x35
    Aug, 2010
    Dale
    After living there for 20 years and following a year long financial struggle, and failed Loan Mod attempt, I lost my home to foreclosure a few weeks ago. I refinanced the house 2 years ago to buy my wife out as part of a property settlement agreement to our Legal Separation. Will I be taxed on the debt relief by Calif and the IRS?
    0 Votes

  • 35x35
    Aug, 2010
    Bill
    It is impossible for me to say whether your friend's creditor will or will not choose to file a lawsuit to collect the deficiency balance, or if it will forgive the deficiency and send your friend a 1099. I am unable to determine if New York offers its own version of the Mortgage Forgiveness Debt Relief Act.
    0 Votes

  • 35x35
    Aug, 2010
    Ken
    A friend owns a coop in NYC they are either going to return to the bank via Deed-in-lieu or Surrender in bankruptcy. Will they receive a 1099 (A or C) for a deficiency amount? And will they owe taxes on it, that is does the MFDR Act mean they wont have to pay taxes Federal and State? The coop is a prime residence for 5 years and the deficiency amount will probably be around 100,000 max.
    0 Votes

  • 35x35
    Aug, 2010
    Monica
    Does the mortgage forgiveness Act also apply to state income taxes owed on the forgiven mortgage balance? And is the state rate for those taxes based on your income bracket? We are in California.
    3 Votes

  • 35x35
    Aug, 2010
    Bill
    Primary residence is not defined precisely in the Act. If your mail, your driver's license, car registration, and most of your bills go to the home you own and your spouse's medical condition is recent or transitory, then I would argue that is your residence. However, that and $5 buys you a cup of Starbucks. Consult with an attorney in your state who has experience in tax law, who will be able to ask probing questions, learn more about your situation, and render a precise opinion.
    0 Votes

  • 35x35
    Aug, 2010
    Dee
    We bought our home in 2005. We have lived in our home since we bought it. Our daughter lives with us also. My husband got ill and we sleep at our son's house which he is renting. The reason for this is that our home does not have a downstairs bedroom and full bath. Our son's place does. My husband is not able to be going up and down the stairs. I am not making any income on my home. My daughter continues to live there. Would we qualify for the mortgage forgiveness?
    0 Votes

  • 35x35
    Aug, 2010
    Bill
    For California residents the answer to your question is yes. Please see the Franchise Tax Board document Mortgage Forgiveness Debt Relief Extended.
    0 Votes

  • 35x35
    Jul, 2010
    Laura
    Hi, Do I qualify for The Mortgage Forgiveness Debt Relief Act of 2007 if I bought my home as my single/principal property (I lived in it for 4 years) but then moved out of state and rented the property for 1 year? Thanks, Laura
    0 Votes

  • 35x35
    Jul, 2010
    Bill
    At first glance, I think you are in a gray area. IRS document 4681 reads in part, "Your main home is the home where you ordinarily live most of the time. You have only one main home at any one time." Consult with an attorney who has experience in tax law who will review your facts in more detail.
    0 Votes