"I appreciate all of the great work you did for me. I look forward to the transaction being completed, and I will continue to refer my friends and associates to you. You have made this a very tolerable and comfortable experience."
- Jamie, Short Sale, 4/6/12
"I spent over a year with a previous company and Michael Kara had it sold and closed in less than 4 months."
- TJ, Short Sale, 11/14/11
"The process was easy. I had no issues understanding what was needed and when I did, they explained it perfectly."
- Franz, Short Sale, 4/10/12
"I want you to know that each of you played such an important role in the process. The Kara team was so courteous and each member demonstrated true professionalism."
- Paul, Short Sale, 02/17/2012
IRS Tax Relief
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation:
When dealing with short sales and DILs, homeowners should be aware of the possible tax implications due to forgiven debts.
According to the IRS, 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 means tax relief will be given to those homeowners who have been forgiven of debt on their principal homes from 2007 through 2012. The Act allows homeowners to exclude cancelled debt from taxable income.
When a lender forgives a debt, they are required to report the amount to the homeowner and the IRS. Lenders fill out Form 1099-C which claims the forgiven debt as income. A good tax professional will know how to offset this income easily.
When is forgiven debt not taxable? There are several occasions when cancellation of debt is not taxable. These include:
Qualified principal residence debt as defined by the Mortgage Debt Relief Act of 2007
Bankruptcy
Insolvency
Certain Farm Debts
Non-recourse loans.
It is important to note that a home sold at a loss and the remaining loan is forgiven, as in the case of a short sale, is considered a cancellation of debt. In a short sale, the lender will file a Form 1099-C if the amount of forgiven debt is over $600. Under this Act, only primary residences, not second homes, qualify for debt relief.
At Kara Homes & Associates, we are an experienced team of real estate professionals who can help you understand the tax implications of your short sale. Please contact us with any questions or concerns you may have. We’d love to help you.
Ten Facts about Mortgage Debt Forgiveness
Provided by IRS.gov
IRS Tax Tips 2010-44
If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness.
Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
The limit is $1 million for a married person filing a separate return.
You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
Debt forgiven on second homes, rental properties, business properties, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit IRS.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.
Taxpayers may obtain a copy of this publication and Form 982 either by downloading them from IRS.gov or by calling 800-TAX-FORM (800-829-3676).
