If you were among the millions of homeowners caught in the mortgage foreclosure fiasco or who if you have had your debt reduced through a mortgage restructuring, you may qualify for special tax relief when you file your 2008 tax return.
Normally, if a commercial lender cancels a portion of your mortgage debt through a transaction known as a "short sale" or your debt is wiped out in a foreclosure, the forgiven debt is considered taxable income. Congress approved legislation in 2007 that excludes up to $2 million of indebtedness if it is secured by a principal residence. Last year, lawmakers extended the homeowners' relief through 2012.
For example, say you bought a home several years ago for $500,000 and last year it was worth $350,000. But your mortgage balance was still $450,000 and on top of that, you lost your job. With no way to make the monthly mortgage payments and no hope of selling your house in a depressed real estate market, you hand the deed back to the bank and walk away.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
From a tax standpoint, two things happened. Your lender canceled $100,000 worth of debt and you realized a $150,000 loss on your house. Luckily, you qualify for the principal residence indebtedness provision and can exclude the $100,000 worth of canceled debt -- normally considered taxable include -- on your 2008 tax return.
Use Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) to report the cancellation of $100,000 worth of debt. You reduce the basis in your home by the same amount. So instead of a $150,000 loss on the sale of your home ($500,000 purchase price minus the $350,000 value at the time of foreclosure), you now have a $50,000 loss ($150,000 minus $100,000 in canceled debt.) It won't affect your taxes because losses on the sale of a principal residence are not deductible any way. Bottom line: the foreclosure has no impact on your 2008 tax bill.
The tax relief does not apply to vacation or other second homes or to "cash out" refinancing that went to pay for other purchases or to wipe out credit card debt. "It will only help those who borrowed too much to acquire, build or improve a principal residence," says Robin Christian, Senior Tax Analyst for the Tax & Accounting business of Thomson Reuters.
There are other exceptions, too. Seller-financed mortgages -- meaning the home’s prior owner loaned you money to buy the house -- are not covered by the cancellation of debt provision. And debts discharged through bankruptcy are not considered taxable income.
-
Stock Market Today: Have We Seen the Bottom for Stocks?Solid first-quarter earnings suggest fundamentals remain solid, and recent price action is encouraging too.
-
Is the GOP Secretly Planning to Raise Taxes on the Rich?Tax Reform As high-stakes tax reform talks resume on Capitol Hill, questions are swirling about what Republicans and President Trump will do.
-
Ten Cheapest Places To Live in FloridaProperty Tax Make your Florida vacation spot daily living — these counties have the lowest property tax bills in the state.
-
Missed Tax Day? Nearly One Million Taxpayers Still Can File and Claim Valuable Tax RefundsTax Refunds As many as one million taxpayers could be missing out on a significant tax refund.
-
Which Generation Pays the Most Tax in the US?Tax Burden Polls show that most people feel like taxes are unfair. But which age group bears the brunt of the tax burden in the United States?
-
Tax Day 2025: Don’t Miss These Freebies, Food Deals and DiscountsTax Day You can score some sweet deals on April 15 in some select restaurants like Burger King, Shake Shack, and more.
-
Tax Time: Does Your Kid Influencer Owe Taxes?State Tax Some minors are making big money on social media. Here’s how to know if they need to file taxes.
-
Trump Plans to Terminate IRS Direct File programTax Filing The IRS Direct File program was piloted last year in 12 states and has since expanded to 25. But will it last under the Trump administration?
-
How Caregivers for Adults Can Save on Taxes in 2025Tax Breaks Caring for your parent or spouse can be stressful, but the IRS offers tax breaks for qualifying taxpayers. Here they are.
-
U.S. Treasury to Eliminate Paper Checks: What It Means for Tax Refunds, Social Security
Treasury President Trump signed an executive order forcing the federal government to phase out paper check disbursements by the fall.
