The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). 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.More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17. The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation: What is Cancellation of Debt? 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. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you. Is Cancellation of Debt income always taxable? Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve: Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners. Bankruptcy: Debts discharged through bankruptcy are not considered taxable income. Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences. These exceptions are discussed in detail in Publication 4681. What is the Mortgage Forgiveness Debt Relief Act of 2007? The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. What does exclusion of income mean? Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts? No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately. Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home? Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681. How long is this special relief in effect? It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012. Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income? The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681. If the forgiven debt is excluded from income, do I have to report it on my tax return? Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return. Do I have to complete the entire Form 982? No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return. Where can I get this form? If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at IRS.gov, or call 1-800-829-3676 begin_of_the_skype_highlighting            1-800-829-3676      end_of_the_skype_highlighting. If you call to order, please allow 7-10 days for delivery. How do I know or find out how much debt was forgiven? Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982. Can I exclude debt forgiven on my second home, credit card or car loans? Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details. If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision? Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent.  You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples. I lost money on the foreclosure of my home. Can I claim a loss on my tax return? No.  Losses from the sale or foreclosure of personal property are not deductible. If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt? Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was canceled in a title 11 bankruptcy case.  An exclusion is also available for the cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a Midwestern disaster area.  See Form 982 for details. If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence? Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Will I receive notification of cancellation of debt from my lender? Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form. What if I disagree with the amount in box 2? Contact your lender to work out any discrepancies and have the lender issue a corrected Form 1099-C. How do I report the forgiveness of debt that is excluded from gross income? (1) Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2.  Any remaining canceled debt must be included as income on your tax return. (2) File Form 982 with your tax return. My student loan was cancelled; will this result in taxable income? In some cases, yes. Your student loan cancellation will not result in taxable income if you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation. Are there other conditions I should know about to exclude the cancellation of student debt? Yes, your student loan must have been made by: (a) the federal government, or a state or local government or subdivision; (b) a tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are considered public employees; or (c) a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization. Can I exclude cancellation of credit card debt? In some cases, yes. Nonbusiness credit card debt cancellation can be excluded from income if the cancellation occurred in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See the examples in Publication 4681. How do I know if I was insolvent? You are insolvent when your total debts exceed the total fair market value of all of your assets.  Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts. How should I report the information and items needed to prove insolvency? Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation.  You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation. To claim this exclusion, you must attach Form 982 to your federal income tax return.  Check box 1b on Form 982, and, on line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately prior to the cancellation.  You must also reduce your tax attributes in Part II of Form 982. My car was repossessed and I received a 1099-C; can I exclude this amount on my tax return? Only if the cancellation happened in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See Publication 4681 for examples. Are there any publications I can read for more information? Yes. (1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues. (2) See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov.

Reference: http://www.irs.gov/individuals/article/0,,id=179414,00.html

Is The Mortgage Crisis Affecting You?

Mortgage got you down?

Mortgage Troubles?   You’re not alone!  Approximately 11 million U.S. home owners are upside-down on their mortgage.  Now is the time to take advantage of programs designed to help.  Homeowners who are “underwater” in their homes – owing more on their mortgage than the value of the home – can turn to a short sale to avoid foreclosure.   Simply put, a short sale is accomplished when the homeowners sell the property and their lender or multiple lien holders agree to accept the sale price as payment on the loan. First, review your options. The table below shows several options and the associated impact of choosing one over the other:
Optionsà Loan Mods Short Sales Deed-in-Lieu Bankruptcy Foreclosure 3Impact ↓↓↓ Debt Relief Deferred pay or reduced rates Property debt relief Property debt relief Personal & property debt relief Property debt relief Keep Home Yes (for now) No No Maybe No 2Credit Score No impact ~50+ points (w/o late payments) ~85-165+ points ~100+ points ~85-165+ points 2Credit History No impact “settled or paid as negotiated” 2-7 Years 10 years bankruptcy entry 10 years foreclosure entry Future loan accessibility No impact 2 years (less w/o late payments) 2-7 Years 2+ years 4-7 Years 1Tax implications N/A Tax forgiven Tax forgiven Tax forgiven Tax forgiven
1Mortgage Forgiveness Debt Relief Act of 2007 – Federal Tax on deficient amount forgiven through 2012 on primary residence. 2Credit ratings are illustrative purposes and may not reflect your specific scenario. 3Consult your CPA and legal advisor for details specific to your situation.
In many cases, a short sale can be the best option and offers many benefits such as: Property debt relief Less impact to credit score Shorter credit history records Future loan accessibility Ability to exclude forgiven debt from federal tax Stops any ongoing foreclosure. Ability to stay in the home until it is sold. However, the process can be complicated and frustrating.  Our team has 16 years of experience and has been through it many times.  We understand the short sale process and will: manage the process from start to finish keep you informed along the way help deter harassing phone calls do the work for you at NO out-of-pocket cost to you. Contact us to schedule a free and private consultation.
Donita Dickinson Designated Broker Email: Donita@donitadickinson.com ( (206) 979.7370 | Ê (800) 756 5914	David Parsons Real Estate Broker Email: David@donitadickinson.com ( (425) 879.0848| Ê (800) 756 5914

Searching for short sales or foreclosures in King County?

We just added a great new tool to help in your search. We created two new links to simplify the difficult task of finding bank owned homes and short sale listings.

 http://www.donitadickinson.com/foreclosures.html and

 http://www.donitadickinson.com/shortsales.html

 Each link will take you to a map with all of the corresponding listings. You can edit the search by zooming in to the area you are interested in, or by modifying the price, or minimum/maximum square footage options and so on.

We are very excited about this new feature and hope you will find it easy to use.

Short Sale… From a seller’s perspective.

Nowadays its more common than not to see a seller owe more on their home than what it’s worth. It’s an unfortunate place to be in when you’re faced with needing to sell your home.

I was meeting with a seller the other day who owes $625,000 on their home. They wanted me to list the home for $680k to give them room to negotiate down in price and still cover their closing costs. The reality is that the current value of the home is only $575,000. That means that the seller has three choices. a) Stay in the home and try to keep up on the payments. b) Go to closing and pay the difference, not an option as they don’t have the money, or c) Negotiate with their lender and do a short sale.

This seller hadn’t thought about the short sale option but was intriqued by the idea. She called her lender and was told that “yes” in fact, she could do a short sell and if she stayed current on her mortgage payments that it wouldn’t negatively affect their credit…. not sure if that is true for every company.

She received a verbal approval and a short sale package in a couple of hours and we are well on our way to getting her home sold.

What I realized with this seller is that she had a huge sense of duty in needing to repay the full amount of the loan. Unfortunately, that wasn’t going to be an option. The market just isn’t going to bear the price she needed to get and she can’t afford to stay in the home until the market turns around. She’s still current on her mortgage and does not want to fall behind. She has a sense of shame in not being able to repay the entire debt.

We talked about that for a long time and came to the conclusion that the market collapsing was not her fault and she couldn’t control the declining price values. We also concluded that by her being pro active she was going to be helping the lender out. They won’t have a bad debt on their hands because she will stay current on her mortgage, the lender is making that possible by deferring two of her mortgage payments until the home sells. In addition, they do not have to spend money trying to collect a bad dept or foreclose. They win by writing off less and she wins by saving her credit and being able to get into something more affordable.

The majority of people that I’ve seen in this situation are trying to be responsible. They just don’t know the proper steps to take. If you’ve called your lender and they told you you had to be behind on your mortgage before they would consider a short sale, call a reputable professional to help.

Banks are failing! Our financial system in ruins! Should I still buy a house?

No matter what happens, you’ll always need a place to live — the real question is can you buy a house you can afford? If so, then maybe it IS time to buy a house. After all, mortgage rates and house prices are both lower than they have been in years, plus there’s more inventory. This all translates to an optimal buyer’s market. You as the buyer have the control and plenty of homes to choose from.

But what about the much-hyped threat of bank failures? Bank failures, which are very rare, wouldn’t affect your mortgage much. (If the bank that held your mortgage failed, never fear; some other bank would take over the loan and happily accept your payments. Banks love to take your payments!) And the FDIC guarantees the money in your checking and savings accounts in the event that your regular bank should run into trouble. Chances are, it won’t.

Finding the Right Contractor

Sellers and buyers often have one thing in common: there’s something about their house that they want or need to fix.

The first way to find a reliable contractor is to ask for personal recommendations. Your family, friends, neighbors and coworkers all have to fix up their houses from time to time and they’ll probably be happy to share their experiences.

But when you’re working with a real estate agent, another great option is to ask her who she recommends. Like most agents, I have a list of contractors and companies I’ve worked with before, and unlike your neighbor Joe, I’ve usually had more than one experience with each servicer. Chances are, the companies I have relationships with will work hard to make you happy because they know I’ll get your feedback on their services and if they don’t perform well, I’ll remember that next time somebody asks me who I’d recommend.

Another source you might turn to is Angie’s List. If you read the paper you’ve probably seen Angie’s List advertised – it seems like their ad shows up in the Seattle Times nearly every day. Angie’s List is a subscriber service where you can research service companies, read reviews by other people who have used them, and leave your own ratings and reviews. Sort of like word of mouth, on a larger scale. But keep in mind, the largest companies with the best ratings may be more expensive than the smaller contractors, who may not have ratings in the service simple because they don’t do the same volume of business.

It’s a Great Time to Buy — Really

The Economic Stimulus Act passed by congress this spring is best known for the “stimulus checks” which are now being sent out to taxpayers across the country. But the act also did a big favor for local homeowners by allowing government lenders Fannie Mae and Freddie Mac to gaurantee or purchase larger loans than ever before.

Up until April, any loan above $417,000 was considered a “jumbo” loan, and the larger loans usually meant a higher interest rate, among other things.

But thanks to the Economic Stimulus Act, buyers in the Seattle-Bellevue-Everett metro area can now get a regular, conforming loan of up to $567,500 without having to invest in a “jumbo” loan. And that’s great news, because the lower interest rates of non-jumbo loans mean lower payments, and lower payments mean you can get more house for your money.

Thanks to the Economic Stimulus Act, our local market has a good number of homes available, relatively stable prices, and reasonable loan limits. Many sellers are willing to negotiate with buyers, and yet buyers in our area don’t face the enormous worry of falling house prices that are present in other areas of the country. And with houses staying on the market a bit longer than just a couple years ago, buyers have time to look around and really consider their options. All in all, it’s a great time to be a home buyer.

The new loan limits are available through the end of December, 2008, and it’s possible they may revert to the old, lower limits at the start of 2009. Many economic experts have suggested housing prices may start rising again in 2009, so if you’re thinking of buying, now might be the best time in years.

Saving Money (and Energy) in your Home: 4 Quick & Easy Tips

I’m sure you realize that it costs you money every time you turn on the furnace, run the air conditioner, or use the hot water faucet. But you might not realize how much a few quick, easy, and relatively inexpensive changes to your house can save you over time.

1. Insulate your hot water heater. Most electric water heaters can be insulated with an insulating blanket for around $20. Check with your manufacturer or manual before you buy one, and don’t try to insulate a gas heater — but insulating your electric heater can reduce the amount of heat that leaks out of your hot water, thus reducing the amount of energy you need to keep it warm.

2. While you’re working on your water heater, turn down the temperature. Many experts recommend lowering your water heater temperature from the standard 140 degrees F down to 120 degrees F. You’ll save around 3-5% for each 10 degrees you lower the temperature, and 120 F is high enough for most household uses. As a bonus, using a lower temperature will help prevent hot water from scalding young children, and can help prevent mineral buildup and corrosion of your water pipes as well, which will also extend the life of your water heater.

3. Fix leaky ducts. Use duct tape to tape around the seams in the heating and cooling pipes in the basement, crawl space, and attic. Sealing the seams will prevent air from leaking out while the system operates, meaning more warm (or cool) air will get where it’s going, and your heater or air conditioner won’t have to work as hard getting it there

4. Automate your thermostat. If you don’t have a programmable thermostat, consider installing one. Automating your heating system will help you keep temperatures level, which and it takes less energy to maintain a temperature than to heat or cool a house. And with a programmable thermostat, you don’t need to worry about forgetting to turn down the head at bedtime or when you leave for the day. While you’re at it, be sure to lower the nighttime temperature in your home during cold months — reducing temperatures by 10% overnight during cool months can save as much as 10% off your heating bill. Raise your temperature during warm months so your a/c can take a break.

Seattle Gas Prices

Have you seen the price of gas lately?! As prices continue to soar, you may notice that prices vary widely among different gas stations in the same city. Before you fill up, check out http://www.seattlegasprices.com and enter your ZIP code to find the very best (and worst) gas prices in and around Seattle.