Orlando Real Estate Voice

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. 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.

Government officials launching the “Making Home Affordable” program also acknowledge that the initiatives are only a partial fix for a sweeping problem that has helped plunge the U.S. economy into the worst recession in decades. In fact, tens of thousands of homeowners in some of the most battered real estate markets – concentrated in California, Florida, Nevada and Arizona

There was also skepticism that banks would be willing to participate.

The Obama administration’s program has two parts: one to work with lenders to modify the loan terms for up to 4 million homeowners, the second to refinance up to 5 million homeowners into more affordable fixed-rate loans.

For the modification program, borrowers who are eligible will have to provide their most recent tax return and two pay stubs, as well as an “affidavit of financial hardship” to qualify for the loan modification program, which runs through 2012.

Borrowers are only allowed to have their loans modified once, and the program only applies for loans made on Jan. 1, 2009

For the refinance program, only homeowners whose loans are held by Fannie Mae or Freddie Mac are eligible and have until June 2010 to apply.

Consumers should contact their loan servicer – the company that sends out their monthly bill – to find out if their mortgages are held by Fannie or Freddie. The two mortgage finance companies own or guarantee almost 31 million home loans – more than half of all U.S home mortgages.

Many mortgage brokers, however, are critical. They argue the fees imposed by Fannie and Freddie over the past year make it difficult for borrowers to afford to refinance. The two companies, which are now government controlled, have yet to detail how they will implement the plan, or whether any fees will be rolled back.

Meanwhile, action to put in place another part of Obama’s housing plan is expected soon on Capitol Hill.

House Democrats agreed Tuesday to narrow proposed legislation that gives bankruptcy judges the power to change the terms of mortgage loans for debt-strapped borrowers.

In the latest version of the bill, judges would have to consider whether a homeowner had been offered a reasonable deal by the bank to rework his or her home loan before seeking help in bankruptcy court. Borrowers also would have a responsibility to prove that they tried to modify their mortgages.

A full vote in the House could come as early as Thursday.

***************************************************************************************

Jerry LaRose is an Orlando Area Residential Real Estate Expert, who can assist you with the purchase and/or sale of Real Estate in Orlando, Windermere, Winter Garden Florida or any place in the country. Jerry has created a team of professionals throughout Orlando and the country to ensure that you enjoy a smooth transition to your new area. Please visit http://OrlandoShortSaleExpert.com or www.JerrySellsOrlando.com for your real estate needs. Please give me a call if you have questions about the Orlando and Central Florida real estate market.

P.S. If you are listing your home as a short sale in Orange County Florida and Orlando, Windermere, Winter Garden, or Ocoee Florida make sure you hire an agent who knows how to do short sales and has the experience to get the job done. We are doing successful short sale packages. Call us at 407-580-7011 to find out more about Orange County Short Sales and Orlando Area Short Sales.

Housing and Economic Recovery Act of 2008 FAQ

U.S. Department of Housing and Urban Development

 

www.hud.gov

August 4, 2008

Q: How will the law help struggling homeowners keep their homes?

A: Through the Federal Housing Administration (FHA), an estimated

400,000 borrowers in danger of losing their homes will be able to refinance

into more affordable government-insured mortgages. The program offers

government insurance to lenders who voluntarily reduce mortgages for at-

risk homeowners to at least 90% of the property’s current value.

 

Q: When will the program begin?

A: The program will begin on October 1, 2008 and sunset on September

30, 2011. Homeowners in danger of losing their homes before October 1,

however, should not wait to contact their loan servicers and should begin

applying for federally insured mortgages now.

 Q: Who is eligible?

A: To be eligible to participate in this program, a borrower must:

• Have a loan on an owner-occupied principal residence. Investors,

speculators, or borrowers who own second homes cannot participate

in this program.

• Have a monthly mortgage payment greater than at least 31 percent of

the borrower’s total monthly income, as of March 1, 2008.

• Certify that he or she has not intentionally defaulted on an existing

mortgage, and did not obtain the existing loan fraudulently.

• Not have been convicted of fraud.
•  

Q: How can a homeowner access this new program?

A: Homeowners or a servicer of an existing eligible loan need to contact an

FHA-approved lender. The FHA-approved lender will determine the size of a

loan that a borrower can reasonably repay and that meets the requirements

of the program. If the current lender or mortgage holder agrees to write-

down the amount of the existing mortgage and make the new loan

affordable, the FHA lender will payoff the discounted existing mortgage.

Loans provided under this program must be 30-year fixed rate loans.

 Q: Are lenders required to participate in this program?

A: No. The program is completely voluntary for lenders, investors, loan

servicers, and borrowers.

 Q: How does this law help neighborhoods that have been hit by theforeclosure crisis?

A: The impact of the current crisis has not been isolated to individual

borrowers or investors, but has been felt broadly by neighbors,

communities, and governments across the nation. The law strengthens

neighborhoods hit hardest by the foreclosure crisis by providing $3.9 billion

in Community Development Block Grants to states and localities to buy

foreclosed homes standing empty, rehabilitate foreclosed properties, and

stabilize the housing market.

 Q: Will this law be a bailout for speculators, homeowners, investors,

and lenders?

A: No. It is narrowly tailored to keep families in their homes. For example:

• Only primary residences are eligible: NO speculators, investment

properties, second or third homes will be refinanced.

• Investors and lenders must take big losses first in order even to

participate. The owner of the old mortgage can get a maximum of

90% of the current value of the home (which presumably will be

considerably less than the value of the original loan). In many cases

the loss will be significantly greater, but 10% is the minimum.

• In addition, lenders must waive any penalties or fees, and help pay

            for the origination and closing costs of the new loans.

• Most homeowners will have seen the equity in their homes disappear

 before being able to refinance under this program. In addition, the

FHA will get a portion of any future profits on the house, to make sure

the government recoups its investment over the long run.

 Q: Will this law reward families who bought homes they could notafford?

A: Many homeowners facing foreclosure were misled, were deceived, or

were in other ways the victims of unfair lending practices. To prevent future

abuses by lenders, this law will establish a nationwide loan originator

licensing and registration system to set minimum standards for all

residential mortgage brokers and lenders. It also strengthens mortgage

disclosure requirements to help ensure that borrowers understand their

mortgage loan terms.

 

Q: How will this law make it more affordable to own a home?

A: There are a number of provisions that will make homeownership more

affordable:

• Creates a refundable tax credit for first-time homebuyers that works

like an interest-free loan of up to $7,500 (to be paid back over 15

years) .

• Grants states $11 billion of additional tax-exempt bond authority in

2008 that they can use to refinance subprime loans, make loans to

first-time homebuyers and to finance the building of affordable rental

housing.

• Raises conforming loan limits for the FHA, Fannie Mae and Freddie

Mac to $625,500. Because of the high cost of housing in California, a

majority of the state IS residents were previously shut out from these

programs. Raising these loan limits will lead to lower interest rates on

some loans, greater refinancing opportunities, and enable more

borrowers in high cost areas to avoid the type of nontraditional and

frequently abusive loans that led to the current crisis.

• Provides couples using the standard deduction with up to an

additional $1,000 deduction for property taxes ($500 for individuals).

 Q: Does the law provide help to those who still cannot afford to own a

home?

A: Yes. The bill includes a number of provisions to increase the supply of

affordable housing, which has been a major problem in California pre-

dating the current foreclosure crisis. For example:

• The bill creates a new permanent affordable housing trust fund -

financed by Fannie Mae and Freddie Mac and not by taxpayers – to

fund the construction, maintenance and preservation of affordable

rental housing for low and very low-income individuals and families

nationwide in both rural and urban areas.

• In addition, the legislation provides a temporary increase in the Low-

Income Housing Tax Credit and simplification of the credit to help put

builders to work to create new options for families seeking affordable

housing alternatives.

 Fact Sheet: 

The President has signed into law legislation that will allow HUD’s Federal

Housing Administration (FHA) to continue providing targeted mortgage

assistance to homeowners. The Hope for Homeowners program will

continue FHA’s existing and successful efforts to provide aid to struggling

families trapped in mortgages they currently cannot afford. Under the

program, certain borrowers facing difficulty with their mortgage will be

eligible to refinance into FHA-insured mortgages they can afford. The

program will be implemented on October 1, 2008.

 

Homeowners May Already Be Eligible For Assistance

Families should not wait to seek mortgage relief. Right now, homeowners

can determine if they are already eligible for mortgage assistance through

FHASecure, FHA’s existing refinancing program. They can obtain

information through any of the following options:

 

1. Contact a local, HUD-approved housing counseling agency at

www.HUD.gov;

2. Contact the HOPE NOW Alliance at (888) 995-HOPE; or

3. Call FHA at (800) CALL-FHA.

Sustainable. Affordability Homeownership

Hope for Homeowners maintains FHA’s long-standing requirement that

new loans be based on a family’s long-term ability to repay the mortgage.

FHA only allows owner-occupants to be eligible for FHA-insured

mortgages. Borrowers must also meet the following eligibility criteria:

• Their mortgage must have originated on or before January 1, 2008;
• Their mortgage debt-to-income must be at least 31 percent;
• They cannot afford their current loan;
• They did not intentionally miss mortgage payments; and
• They do not own second homes.

Features of FHA-insured loans under the new program include:

• 30-year, fixed rate mortgage;
• Maximum 90 percent loan-to-value ratio;
• No prepayment penalties;
• $550,440 maximum mortgage amount;
• Extinguishment of any subordinate liens; and
• New home appraisals from FHA-approved appraisers.

 

HUD, Treasury, FDIC and the Federal Reserve will form the

Congressionally-mandated Board of Directors and work together to

establish additional program standards.

 Voluntary Lender Participation

FHA will continue to offer lenders an alternative to foreclosing on

borrowers. Similar to FHASecure’s recent expansion, lenders will be

encouraged to write-down the outstanding mortgage principal balances to

90 percent of the new value of the property. In many cases, reductions in

principle will cost lenders less than the losses associated with foreclosure.

 Market Stability and Liquidity

By continuing to slow the rate of foreclosures, this program will support

FHA’s existing effort to stabilize local housing markets. From September

2007 to June 2008, FHA has guaranteed more than $93 billion of mortgage

capital.

 

Funding .

FHA will insure up to $300 billion in new loans. Borrowers will pay an

upfront premium of 3 percent of the original mortgage amount and an

annual premium of 1.5 percent of the outstanding mortgage amount. Any

additional costs incurred by FHA will be reimbursed by Fannie Mae and

Freddie Mac.

 Program Timeline

The program will last from October 1, 2008 through September 30, 2011.

Since September 2007, FHASecure has helped more than 290,000 families

obtain safer, more affordable mortgages. FHASecure is on pace to help

500,000 families by the end of the year.