Keys Homes
Sunday, June 23, 2013
Clock is ticking down on forgiveness

By Regina Corcoran Citizen Colmnist

CLUNK!!!

Could it be? Is that the sound of the sky falling?

Once upon a time, if you owed a debt to someone else and they cancelled or forgave that debt, the cancelled amount could have been taxable.

And it may be again.

The Mortgage Debt Relief Act of 2007 saved many taxpayers from owing taxes when their homes were foreclosed or they were granted mortgage modifications or a short sale.

Imagine you bought your house for $100,000 in 2006. You borrowed $90,000 to finance the purchase. In 2011, your home is worth only $75,000 but you still owe $85,000. And you just lost your job. And the bank foreclosed. They sold your house for $75,000. They forgave you the difference ($85,000-$75,000) or $10,000. Later, the IRS sends a letter saying that $10,000 is income and now you owe the taxes on it plus penalties and interest.

The Mortgage Debt Relief Act of 2007 saves you from that gruesome IRS nightmare. In this example, the $10,000 would be excluded from your taxable income.

Here's the deal. Any debt forgiveness for a mortgage on your primary residence, used to buy or improve it, up to $1 million per taxpayer may be excluded from income. Check with your tax attorney, C.P.A. or professional tax preparer to see if it applies to you.

Salvation is yours, too, if you use commercial or investment property to generate revenue. Imagine, for example, you are in the restaurant business and you bought a building to operate a restaurant. Forgiveness of debt would likely be non-taxable for you, too.

But, CLUNK! Was that another piece?

What's the problem? That doesn't describe the track of most people who lost their homes in foreclosure or endured a short sale.

Their story was more like this. They bought their home in 2003 for $100,000 with a $90,000 mortgage. In 2004, they refinanced the mortgage to buy a new car. The new loan amount became $135,000.

The homeowners bought a lot of stuff with their credit cards. So, in 2006, they refinanced again, to pay off the credit cards because the new mortgage rate was much lower than the rates charged by the credit card companies. The new loan is $175,000.

Now, in 2011, the borrowers lost their jobs. The house isn't worth as much as it was in 2006. The bank forecloses . . .

And, yes, on this new plane of reality, the borrowers are probably going to owe some taxes on what the bank forgives.

CLUNK! CLUNK! Oh, give me a break! What now?

Mortgage Debt Relief Act of 2007 applies to debt forgiven in calendar years 2007 through 2012. Ruh-ro!

Fortunately, the fiscal cliff bill enacted at the 13th hour by the Congress extended the relief through the end of 2013.

Before you know it, WHOMP! Christmas will be here.

What do you think?

Regina E. Corcoran, SRA, is a Florida real estate broker, state certified appraiser and residential appraiser and residential contractor. She is president of AmeriRealty Corp. and vice president of AmeriMortgage Corp. She can be reached at ReginaECorcoran@cs.com Corcoran writes her column exclusively for the Citizen. It appears every other Sunday.

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