Tax Help for those Facing Foreclosure or Short Sales

From Ilyce R. Glink at Inman News:

It's January, which means it's time to start thinking about filing your taxes. But you may need extra tax help this year, thanks to an active December on Capitol Hill.

In late December, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, which provides tax help for homeowners facing foreclosure or who sell their homes in a short sale.

Previously, if the value of your home declined and your bank or lender forgave a portion of your mortgage debt, the tax code treated the amount forgiven as income that could be taxed, according to Eric L. Smith, a spokesman for the IRS.

In other words, if your lender forgave $20,000 in mortgage debt because your house was worth $20,000 less than your mortgage balance, the IRS treated this debt forgiveness the same as income that you earned from your job -- and required you to add $20,000 in phantom income to the amount of your annual income and pay tax on it at your marginal tax rate.

Instead of getting tax help at a time of great need, you were getting a kick in the pants the following April 15.

Under the new rule, taxpayers can exclude up to $2 million of mortgage debt forgiven in 2007, 2008 or 2009 on their principal residence. (The limit is $1 million for a married person filing a separate return.) According to Smith, mortgage debt reduced through restructuring, as well as mortgage debt forgiven in connection with a foreclosure, both qualify for the tax exclusion.

It's worth noting that the Mortgage Forgiveness Debt Relief Act of 2007 applies only to principal residences, not second homes or investment property, says Chet Burgess, an enrolled agent who owns Brookwood Tax Services, in Atlanta. The rules from IRS Section 121 define what a qualified principal residence is, but at a baseline, you must live there the majority of the year.

The IRS doesn't make it easy. You may need some additional tax help to be sure you're filling out the forms correctly.

If this is you, or someone you know, please look into this. If you need any advice or help, let me know. I'll get you in touch with the right people.

Maybe Tax Season will be better than you expected this year.

Dan Hamilton
Keller Williams Greater Columbus Realty
www.HamiltonHomesGroup.com
Search Columbus MLS
Homes For Sale Columbus, OH