Latest on IRS Home Foreclosure and Debt Cancellation - Mortgage Forgiveness Debt Relief Act

[1776Forever]

I am deeply concerned about the millions of people (included my family) who have had their homes foreclosed on and have lost all their life savings who now will be faced with paying the difference on the amount that is paid on the foreclosed home when it is auctioned off and the amount it is said to be worth. When AIG and other banks get their debts repaid with no questions asked the little guy is stuck with money due to the IRS. This is not acceptable!

Here is the latest from the IRS on this - Does this Mortgage Forgiveness Debt Relief Act of 2007 do enough? I hope someone can explain this in easy to understand language.

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Home Foreclosure and Debt Cancellation

http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Update Dec. 11, 2008 — The Mortgage Forgiveness 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, qualify for this relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

The amount excluded reduces the taxpayer’s cost basis in the home. More details. Further information, including detailed examples, can also be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

The questions and answers, below, are based on the law prior to the passage of the Mortgage Forgiveness Debt Relief Act of 2007 - see link to go through these:

http://www.irs.gov/newsroom/article/0,,id=174034,00.html

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Thanks!

:hi:

[marybourg]

1. ". . . with paying the difference on the amount that is paid on the foreclosed home

when it is auctioned off and the *amount it is said to be worth*."

Actually he amount that is considered income is the difference between what the foreclosed home sold for and what the mortgage debt was. If you're never expected to pay that difference back it's "forgiveness of debt" and is considered income, just as if someone gave you the money (that's income) and you paid the balance of the debt with that.

From my reading of what you posted, it looks like the Act is intended to give relief from income taxation of the difference in just such a situation (with some caveats. It would be good to consult an accountant in the year the transaction is completed.)

[1776Forever]

2. Thank you for your post and time - It is appreciated

:hi: