In working with clients and in my real estate networking groups, I've been advising people to seek sound tax advice for mortgage debt that has been forgiven. The media is starting to catch on and the following article does a good job of talking about IRS (federal) tax relief, but does not touch upon the state of California (FTB) tax relief - or rather lack thereof. Click here for the IRS Ten Facts about Mortgage Debt Forgiveness.
If you are unable to maintain your current mortgage and are seeking a Loan Modification or Short Sale, you simply MUST seek a tax professional's advice to determine your specific state and federal tax liability.
IRS tells homeowners how to get tax relief if a lender forgives part of their debt
By Kenneth R. Harney (As seen in the LA Times on Sunday, March 14,2010)
Reduction of mortgage principal, usually considered taxable income, is expected to become more prevalent as the Obama administration and banks seek ways to prevent foreclosures.
With the Obama administration and private lenders actively considering mortgage-principal-reduction programs to help financially distressed homeowners, the Internal Revenue Service has issued an advisory to taxpayers who receive -- or seek to receive -- such assistance if it's offered.
The IRS gets involved in mortgage principal write-downs because the federal tax code generally treats any forgiveness of debt by a creditor in excess of $600 as ordinary taxable income to the recipient.
However, under legislation that took effect in 2007, certain home mortgage debt cancellations -- such as through loan modifications, short sales or foreclosures -- may be exempted from tax treatment as income. More...
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