Including articles about house foreclosure, deductions on mortgage insurance and home sale exclusions for a surviving spouse. Read on to see if these topics affect your taxes.
Article from CCH Group: www.CCHGroup.com
Foreclosure Relief
The housing boom in many areas of the country is in danger of becoming a housing bust. Problems in the lending industry, especially with so-called sub-prime mortgages, have contributed to the slide in home sales and home values. Congress and the Bush Administration have proposed a variety of measures to help homeowners who are caught in the mortgage meltdown. One measure is in the recently-enacted Mortgage Forgiveness Debt Relief Act of 2007.
When a lender forecloses on property, sells the home for less than the borrower’s outstanding mortgage and forgives all or part of the mortgage debt, the Tax Code treats the cancelled debt as taxable income to the taxpayer. The new law temporarily excludes from taxation discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principle residence and incurred in the acquisition, construction or substantial improvement of the residence.
Let’s take a look at an example. Cara’s principal residence is subject to $300,000 mortgage debt. Cara’s creditor forecloses in 2008. The residence is sold for $240,000 in satisfaction of the debt later that year. Cara has $60,000 in income from the discharge of indebtedness. Before the new law, the $60,000 would have been includible in Cara’s gross income. Now it is exempt.
The new law also addresses mortgage workouts. Sometimes, a mortgage workout or renegotiation may result in forgiveness of indebtedness income that would be taxable. The new law helps these taxpayers by giving them a full exclusion, too.
The exclusion in the new law is only temporary. Taxpayers have three years --until December 31, 2009-- to take advantage of the change. The exclusion is also retroactive to January 1, 2007.
If you have any questions about foreclosure relief, give our office a call. We’ll explain the fine points of the new law and explore if it can benefit you. We’ll also keep an eye on further developments to help taxpayers facing foreclosure and reforms for the lending industry when Congress returns to work after its holiday recess.
Mortgage Insurance Deduction
In addition to foreclosure help, Congress also extended the itemized mortgage insurance deduction for three years. If you’re unsure if your mortgage insurance qualifies, give our office a call. We’ll let you know.
Survivor’s Home Sale Exclusion
The new law may also help some recently-widowed individuals. The new law extends the time in which a surviving spouse may use the joint-filers’ $500,000 home sale gain exclusion before being treated as a single individual who is entitled to the $250,000 home sale exclusion. As of January 1, 2008, the sale of a residence that had been jointly owned and occupied by the surviving spouse and the deceased spouse is entitled to the $500,000 exclusion if the sale occurs no later than two years after the death of the individual’s spouse. Some special rules about use and occupancy also apply.