TAX BREAK FOR MORTGAGE DEBT FORGIVENESS NEWS
President Obama's
Emergency Economic Stabilization Act of 2008: $700 Billion Bailout

This federal law provides authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes.

 This law, commonly known at the $700 Billion Bailout,
strengthens the FHA-insured refinance of loans for troubled mortgages under the HOPE for Homeowners program. 
The Tax Exemption for Mortgage Debt Forgiveness on primary loans (1st TD) expires December 31, 2012.  

 Tax law and credit evaluation are complex, ever changing and outside the scope of the real estate licence. Consult a professional tax accountant, tax lawyer and/or credit counselor to explain how delinquency settlement by way of Short Sale, Deed in Lieu of Foreclosure and Foreclosure will affect your taxes and credit. 

The REMERGE Short Sale TEAM does NOT advise or counsel on legal, tax or credit matters.

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3/25/2010 The Los Angeles Times
IRS TELLS HOMEOWNERS HOW TO GET TAX RELIEF IF A LENDER FORGIVES PART OF THEIR DEBT.

Generally, the Internal Revenue Service (IRS) treats debt forgiveness by a creditor as taxable income. However, under federal legislation that took effect in 2007, certain home mortgage debt cancellations—such as loan modifications, short sales, or foreclosures—may be exempted from federal taxes. Other exemptions are also available.

MAKING SENSE OF THE STORY FOR CONSUMERS

Homeowners considering a loan modification, short sale, or foreclosure should note that the federal tax exclusion under the Mortgage Forgiveness Debt Relief Act of 2007 only applies to mortgage balances on a qualified principal residence and not on second homes, rental real estate, or business properties.

The maximum amount of forgiven debt eligible under the 2007 law is $2 million for married taxpayers filing jointly and $1 million for single taxpayers.

The debt reduction only can be for loan amounts used to buy, build, or substantially improve a principal residence, including refinance loans as long as an increase in the total mortgage debt if any is attributable to renovations and capital improvements of the house. However, if refinance proceeds were used for other personal purposes, such as paying off credit card bills, purchasing cars, or investing in stocks, then the mortgage debt attributable to those expenditures is not eligible for tax exclusion under the 2007 law.

California homeowners who sold their house in a short sale or were foreclosed upon in 2009 still may have to pay state taxes on forgiven mortgage debt. The California legislature did not extend the tax exemption for mortgage debt forgiveness for state taxes. However, lawmakers are working on a bill that would provide the same tax relief on state taxes as the federal government currently offers.

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8/19/2010: California Association of Realtors Newsletter
California State Assembly Passes SB 1178 Protecting Homeowners 

Measure protecting consumers from overreaching lenders now goes to governor’s desk for signature

LOS ANGELES (Aug. 19) – The California State Assembly today approved SB 1178 (D-Corbett) by a 49 to 14 vote, extending anti-deficiency protection for consumers who have refinanced their original mortgage loans and now are facing foreclosure. The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) is the sponsor of the consumer-protection legislation.

Under existing law, if a homeowner defaults on a mortgage used to purchase a home—commonly referred to as a “purchase money mortgage”—the homeowner's liability on the mortgage is limited to the property itself.  However, homeowners who refinanced the original purchase debt, even if only to obtain a lower interest rate, were not extended the same protections.  SB 1178 corrects this unfairness and extends the same protections to consumers who refinance their home loans. 

“Cash-out” debt for home improvement or consumer expenses is not protected by SB 1178.  Similarly, additional new debt secured by the home, such as a home improvement loan, is not protected—only original acquisition debt.

“Today’s vote was a victory for homeowners in California, but the fight is not yet finished,” said C.A.R. President Steve Goddard.  “We are urging Gov. Schwarzenegger to swiftly sign into law this crucial piece of legislation.  Passage of SB 1178 will ensure lenders underwrite refinance loans at least as carefully as purchase money mortgages and will provide much-needed consumer protection.”

SB 1178 now moves to Gov. Schwarzenegger for his signature.  If signed, SB 1178 will become effective June 2011.

Leading the way…® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States with nearly 160,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.