Mortgage Cancellation Tax Relief - true or false?

Question

i did yahoo search on Mortgage Cancellation Tax Relief and maybe 9 results with same articles, different links. i called irs today to confirm and a person said he hasn't heard of it. he said usually, irs gets informed before publically announced yet isnt aware of such. also said it's not easy to pin point the eligibility of 1099 bail out or not.
im filing chapt 7 because what irs web stated for 'you may not owe 1099 if you are insolvent, or bankrupt'.
im backing out on a shortsale because of 1099 fear that i'll owe irs for years.

am i making a good decision of filing bankruptcy and how can i rebuild my credit again...?

Answer 1

Bankruptcy is rarely ever a good decision and will haunt you for a long time. If it is at all possible to work something out with your creditors outside of bankruptcy, you will be much better off.

Answer 2

Stop! Do not file Chapter 7 Bankruptcy!

As of September 17th, the IRS has a special Home Foreclosure section on their website:
http://www.irs.gov/newsroom/article/0,,id=174022,00.html

On October 4th the U.S. House of Representatives passed the Mortgage Cancellation Tax Relief Act, H.R. 3648, by a vote of 386 to 27.
http://www.realtor.org/press_room/news_releases/2007/passage_mortgage_cancellation_tax_relief.html

Hopefully this will be completely passed and signed into law by the end of the year, unless Bush vetoes it.

Even if this doesn't pass by year's end, you most likely will not owe anywhere near as much as you might think. Read on...

If you are currently in foreclosure - I believe that the mortgage company will still file the 1099-C form to report the Mortgage Cancellation whether you go through with the short sale or not. In other words, even if you backout of the short sale, they will still repossess the property and cancel the mortgage. You will be in the same tax situation either way.

Also, you either did not get a compete answer from the IRS or they didn't adequately convey all of the details to you.

When your debt is cancelled because of foreclosure, the amount that is taxable as income is the DIFFERENCE between what you owe and the fair market value. Basically, you take the amount owed on the home just prior to the foreclosure and then subtract the fair market value. You pay income tax on the remaining portion, not the entire amount of the mortgage.

There are two different adverse tax consequences you need to know about - the Tax on the Cancellation of Debt - and the Gain from the Disposition of the Home.

Take a look at the calculations given in the examples on the IRS website:
http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Most likely, you will not have to pay the Gain from Disposition because you can exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from your income.

Also, it is possible for you to be insolvent without filing bankruptcy. Foreclosure is bad enough, you don't want to add a bankruptcy to it unless you absolutely have to.

Rather than paying a lawyer several hundreds or even thousands for a bankruptcy, spend a little bit of money and get professional tax advice from a tax preparer who has done several mortgage cancellations. It doesn't necessarily have to be an accountant. Many tax preparation companies have what they preparers who specialize in specific areas. Try to get someone who has done at least 10 returns with foreclosures. Make sure to tell them if you ever used your home for business (full or partial) or if you ever rented it (even if you only rented a room) and claimed it on your taxes. http://www.hrblock.com/taxes/tax_tips/tax_law_changes/foreclosure_tax_help.html

Many many years ago, I had to file bankruptcy due to catastrophic medical costs and I regretted it. A bankruptcy stays on your credit report for 10 years and it is not easy to rebuild your credit.

As far as rebuilding your credit goes, if you file bankruptcy, make sure all of your debts are discharged and that this shows up accurately on your credit report. Then you'll need to learn to live within your means and use cash only - because no one will give you any credit for at least a year. After that, you may be able to get some high interest credit cards, but don't over use them. Learn to live on the cash that you have.

You can also try a service like Lexington Law that helps clean up your credit report. But you won't be ready for that until about 2 years after you file a bankruptcy or go through a foreclosure. Yes, either one will ruin your credit and both will ruin your credit even more.

In the interest of full disclosure - I am currently a REALTOR® licensed in Minnesota and I have prepared taxes for H&R Block in the past.

Answer 3

Same result, you will either owe the bank for the difference between what you owe, and what it was sold for. Or you'll owe the IRS taxes on the difference if the bank writes off your loan, and 1099's you that amount as income. Carefully read the part YOU MAY NOT OWE. many conditions, including past payments, and income. Credit wise better off with the short sale.

Answer 4

I have also been looking into this and I found out that H.R. 3648 has passed the house by a large majority 386 to 27. This bill was sent to the Senate and it was read twice before being sent to the Finance Committee. Now it has to pass this committee and then be approved by President Bush. Because of the vote count in the house I believe that this is going to pass in the Senate and hopefully be approved by the President. If I were you, I would take a short sale. As a matter of fact, I am in the process of the short-sale of my house now.

Good luck!

Answer 5

a million. you in basic terms about threw the e book at the same time as interpreting Order of the Phoenix because of Umbridge's moves fake 2. a number of the failings Draco suggested about Harry were actual actual 3. Harry might want to be someone you will get alongside with fake ( I in basic terms don't have the persistence for that. =/ ) 4. with out Luna, the books would not be a similar actual 5. Hermione annoyed you always actual 6. You felt undesirable for Bellatrix fake 7. You cheered at the same time as Voldemort died actual 8. Ron Weasley is large! actual

Answer 6

to my knowledge the bail out has yet to be decided. personally i would vote no. why should the tax payer support someone who reneged on house payments. I live within my means and the Govt doesn't pay my mortgage. bankruptcy is a last resort to rebuild your credit...pay your bills. easier to do with out the big B blemish.