IMPORTANT: Short Sale, Refinancing, Loan Modification info

Mortgage Default Income Tax Relief
H.R. 3648

Important information:

Have you recently or are thinking about doing any of the following:

• Refinancing
• Short Sale or Pre-Foreclosure Sale
• Loan Modification
• Loan Restructuring
• Ask your Lender to Reduce or Forgive a Debt

Although disliked today by many people with short memories or who don’t even follow his politics and forgot or never even knew all the good that President Bush has done, it seem hating him is the Politically Correct or PC thing to do these days as so many follow suite.

This is really another great thing President Bush has done which is taken for granted these days but many find themselves so thankful for without giving the proper credit where it is due. Without H.R. 3648 real estate would really be dead in the water today to a degree which would be catastrophic in comparison to what is currently being experienced; so for all the leftists and Bush haters out there, I am certain this bill has touched you or someone you know in ways you cannot even begin to imagine.

Due to the act which this article will address many have been able to keep their homes or sell them and make settlement agreements with their lenders for an amount less than what was owed without having to pay an additional income tax for the amount which was forgiven by the lender.

Many people who are using the short sales method today to sell their homes, which has become so common only makes financial sense to do so and made possible to do so due to this act initiated by none other then George W. himself.

"When your home is losing value and your family is under financial stress, the last thing you need is to be hit with higher taxes. So I'm working with members of both parties to pass a bill that will protect homeowners from having to pay taxes on cancelled mortgage debt."

─ President George W. Bush, 9/1/07
VIDEO: President Bush Signs H.R. 3648

Thursday December 20th 2007 President Bush signed into law H.R. 3648: Mortgage Forgiveness Debt Relief Act of 2007 to amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income, and for other purposes.

So what are we really talking about here?
Tax laws consider forgiven debt as income, which can leave those of you with foreclosed homes with some unexpected tax bills. Let's say I loan you a million dollars. Now I go, "Oh, wait. Never mind. You can keep it." The IRS considers that income. You would have to pay the taxes on your million dollars.

The tricky part comes in when I'm not just loaning you a million dollars. I'm loaning you money to buy an overpriced home that you can't afford and I can't sell for as much as you owe me once I take it back from you.

So how does this bill affect me?
Here is where the Mortgage Forgiveness Debt Relief Act of 2007 comes in to play.

Under current law, if the value of your house declines, and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as income that can be taxed.
Under the tax code, a lender who forgives a borrower's debt must provide a form 1099 to the IRS reporting the forgiveness of indebtedness as income to the borrower. The new legislation from Bush provides taxpayers who experience a home loan foreclosure or renegotiation resulting in forgiveness of indebtedness income with three year exclusion up to $2 million.

Bush said during the signing ceremony: "The law will increase the incentive for borrowers and lenders to work together to refinance loans -- and it will allow American families to secure lower mortgage payments without facing higher taxes."
Ahhh…. You may be scratching your head at this point so let’s simplify that a little further.
Under the Mortgage Debt Forgiveness Act of 2007, some homeowners granted forgiveness of mortgage debt won't have to pay taxes on that amount. But there are some restrictions:

1. There is a limit on the forgiven debt: up to $2 million or $1 million for a married person filing a separate return.
2. The tax break also has a time limit. It only applies to mortgage debt discharged by a lender in 2007, 2008 or 2009.
3. The loan also must have been taken out to buy or build a primary residence, not a second or vacation home. If debt is forgiven on those additional properties, the owner will owe cancellation of debt income as usual.

This law comes with a new tax form which must be filed if you find yourself in the unfortunate situation of having to do a short sale or if you are able to manage to work with your lender and by the grace of god manage to get them to forgive some of the debt and restructure you loan so that you can keep your house among other possible scenarios where you experience a debt forgiveness.
You will be required to file the new IRS tax Form 982.

If home mortgage borrowers are entitled to forgiveness for the income tax consequences of their default, who is to blame? Forgiveness of indebtedness income corresponds with the forgiving lender's bad debt deduction.

The House Ways and Means Committee in September, Rep. Kevin Brady, R-Texas, said that he wished the cost of paying for the relief was more tightly targeted to the lenders and real estate speculators who helped create the subprime lending crisis. Committee Chairman Charles B. Rangel's, D-N.Y. response explains it all for you. "It's so much easier to give the tax break than to pay for it."

Either way without the help of the Mortgage Forgiveness Debt Relief Act of 2007 we would be seeing a lot more of this going around. Read the story

Additional Sources:

• IRS on the Mortgage Forgiveness Debt Relief Act
• Mortgage Work Outs Now Tax-Free
• Hope Now The Home Owner Preservation Alliance 1.888.995.HOPE
• FACT SHEET - The Mortgage Forgiveness Debt Relief Act of 2007
• VIDEO: President Bush Signs H.R. 3648
• Official White House Press Release about H.R. 3648 Mortgage Forgiveness Debt Relief Act of 2007
• Wikipedia About George W. Bush
• George W. Bush Presidential Library