Mortgage Woes Spur Tax Break

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RISMEDIA, March 18, 2008-(MCT)-Homeowners who went through a foreclosure or got a deal for working out their mortgage debt should pay attention to a new tax break for debt forgiveness.

Troubled homeowners usually would have to pay taxes on any mortgage debt that was forgiven or canceled by a lender. The view is that if you owed $30,000 but that debt went away after being forgiven by a lender, well, you got an extra $30,000 of ordinary income. It’s like you just won a prize-admittedly it’s a prize that you’re not exactly going to flaunt.

If you got some mortgage relief last year, and it was hard to get, you may be able to take the tax break when filing your 2007 federal income tax returns. Given the painful housing slump, though, it’s essential to know that this tax break would apply in the future for mortgage debt relief given in 2008 and 2009.

We’re seeing this important change to the tax rules, thanks in part to an early push for it by U.S. Sen. Debbie Stabenow. The Michigan Democrat introduced a bill last spring to try to change this tax rule in light of the deep troubles in the housing market in Michigan and elsewhere. Her efforts gained momentum in late August when President George W. Bush included her idea as part of his tax package to assist homeowners.

What You Need to Know:

You do not get a federal income tax break just because the value of your home has fallen. The Mortgage Forgiveness Debt Relief Act of 2007-which was enacted on Dec. 20, 2007-applies to debt forgiveness related to refinancing mortgage debt, foreclosures or short sales, where the lender allows the homeowner to sell the home for less than the mortgage due.

The tax break only applies to the principal residence or home. It does not apply to any debt that might have been forgiven on a second home, a vacation home, credit cards, a car loan or speculative investments in a string of condos in Florida or Nevada.

Look for a Form 1099-C-Cancellation of Debt-from your lender. This form was to be sent out by Jan. 31 for debt that was forgiven last year.

See box 2 for the amount of debt forgiven or canceled.

Get Form 982, fill it out and attach it to your tax return. Go to www.irs.gov. Or call the Internal Revenue Service at 800-829-3676 to request that form or other forms. If you order by phone, you’re going to need to wait 7 to 10 days for delivery.

Barbara Weltman, an attorney and contributing editor for JKLasser.com, said Form 982 must be filed to get the tax break. Or else, the debt forgiveness will be taxable as ordinary income. The lender is required to submit the amount of the canceled or forgiven debt on the 1099-C to the Internal Revenue Service.

For most homeowners, there’s no limit as to how much of the forgiven debt could be excluded from income. There is no dollar limit if the principal balance of the mortgage was less than $2 million at the time the loan was forgiven. See Form 982 if the balance was greater.

The tax break for debt relief could apply to a mortgage that was used to buy, build or substantially improve your main home or refinance debt for those purposes.

Again, remember this is a tax break for forgiven debt-not money lost on the sale of a home.

Mark Luscombe, principal analyst for CCH, a Wolters Kluwer business in Riverwoods, Ill., said homeowners need to be aware that they cannot deduct a personal loss on the sale of a principal residence. So if you bought a house for $150,000 a few years ago, built up equity in the home and then sold it for $120,000, you couldn’t take a $30,000 loss.

© 2008, Detroit Free Press.
Distributed by McClatchy-Tribune Information Services.

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