Short Sales & Mortgage Forgiveness Debt Relief Act of 2007
Homeowners facing a prospective foreclosure have options. One of these options is a brief sale. According to the Federal Trade Commission, when a homeowner’s bank approves his request for a brief sale, it allows him to market the house for less than the amount he owes on his home mortgage. Prior to the Mortgage Forgivness Debt Relief Act of 2007, the IRS required homeowners who sold property through short sales to claim any forgiven debt on their tax returns.
Facts
Traditionally, the forgiven debt has ever been taxable by the IRS. When a lender”forgives” a debt, then it opts not to pursue the borrower for the amount she owes. Rather, the lending company claims the entire amount forgiven as a tax deduction and mails the debtor a Form 1099 notifying her of the forgiven amount. The debtor should include that amount when calculating taxes. The Mortgage Forgiveness Debt Relief Act prevents homeowners who’ve lost property to a foreclosure or short sale from having to pay extra taxes on any debt that their creditors claimed as tax deductions.
Characteristics
Not all former homeowners are eligible to exclude forgiven debt from their taxes after a brief sale. Only homeowners who incurred less than $1 million in debt2 million if married filing jointly–could claim that exemption. In addition, the homeowner should incur the debt through the brief sale or seizure of his primary residence, instead of investment home, to be eligible.
Time Frame
The Mortgage Forgiveness Debt Relief Act was originally meant to stay in effect for only three decades –2007 through 2009. The Emergency Economic Stabilization Act of 2008, however, extended the initial tax defense for former homeowners an extra three decades. Each consumer’s ability to ask tax forgiveness of brief sale debt ends on Dec. 31, 2012.
Procedure
If a lender forgives any debt after a brief sale transaction, it is going to mail a Form 1099 to the previous homeowner. The former homeowner should then download Form 982 from IRS.gov and input the forgiven amount represented on the Form 1099 in traces 1e and 2 Form 982. It is not necessary to complete the entire form. The IRS stipulates that individuals cannot take advantage of their tax exclusion offered by the Mortgage Forgiveness Debt Relief Act when they do not submit Form 982 using their tax returns.
Considerations
In certain scenarios, lenders do not qualify to claim forgiven debt . If a lender cannot claim the debt left over after a brief sale on its own taxes, the prior homeowner does not have to report the trade to the IRS. One such instance of this is when a homeowner sells a home via short sale which has been secured using a non-recourse loan. Non-recourse loans specifically state the that lender has no recourse in case the homeowner defaults other than to seize the property. Some nations, such as California, have laws requiring non-recourse loans for many kinds of mortgages.