Learn More About the Mortgage Forgiveness Debt Relief Act

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.

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.

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.

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.

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.

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.

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.

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.

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.

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! :)

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.

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.

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.

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.