blog/web-journal

Over the past several years, millions of homeowners have had billions of dollars in mortgage debt forgiven, either through foreclosure, refinancing or short sales. It’s important for real estate professionals and homeowners to understand that mortgage debt forgiveness has significant tax consequences.

Here are 10 things the Internal Revenue Service says you should know about mortgage debt forgiveness:

1. Normally, when a lender forgives a debt — that is, relieves the borrower from having to pay it back — the amount of the debt is taxable income to the borrower. Thus, a homeowner who had $100,000 in mortgage debt forgiven through a short sale would have to pay income tax on that $100,000, as an example.

Fortunately, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from your taxable income up to $2 million of debt forgiven on your principal residence from 2007 through 2012. This means you don’t have to pay income tax on the forgiven debt.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude from your taxable income debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

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This is a true story, but I have changed some of the details to protect the people involved.

This is an up close and personal look at foreclosure as it happens to real people. I will admit my own bias, which is that the banks are guilty of bad behavior and have poor business acumen.

This is a true story about a couple who bought a little house in 2003 for $120,000 — they qualified for a special homeownership assistance program and may not otherwise have been able to afford the home. Four years later, their lives had changed and their mortgage payments were almost impossible to afford. The home still needed a new roof and a furnace.

They talked about selling and called their REALTOR®, only to discover that their home was now worth less than they owed on it. They did not have enough money to sell the home. She moved out, they split up, and he got a roommate when she stopped paying her share of the mortgage.

He limped along for a few more years, trying to keep up with the repairs and the mortgage. He got behind on his payments. He talked to the bank and asked for a loan modification. He was repeatedly told he could not get the modification because he was behind on his payments, and even though he struggled to get caught up he could not.

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What to watch for when buying a vacant home…

Tip 1: Peeling, bubbling, and discolored paint; swelling in wall or ceilings (especially around kitchens and bathrooms); or a musty odor.  All indicate water damage, and potentially, the presence of moisture and mold.

 - On-Site Specialty Cleaning & Restoration -