In order to qualify for full exclusion from income when debt is cancelled on the taxpayer’s principal residence, the amount of debt cancelled cannot be more than two million dollars for a married couple or individual; or if an individual is married but filing a separate return, the debt cancelled cannot be more than one million dollars.  Even in California that would be a pretty big house.  The two million dollar limit does not refer to the amount of the home loan, the limitation is only applied to the amount of debt cancelled or forgiven.  The amount of debt cancelled is calculated by subtracting the fair market value of the principal residence from the amount of debt secured against it at the time of cancellation.           

Debt cancellation on a principal residence can occur in a number of different ways.  The most common way people will see this occur is when there is a foreclosure.  In a foreclosure sale, the property is often sold at a value which is less than the amount of the debt.  This will cause cancellation of debt income. 

Another situation in which mortgage debt forgiveness can occur is a short sale.  While that term has long been used in describing certain stock transactions, it has gained popularity in describing the sale of a property for less than the amount of debt secured against it.  When that happens, the lender is paid a “short” amount and does not get paid the remainder of the debt.  For debt cancellation to occur, the lender would have to forgive the amount it failed to receive in exchange for the release of its lien.  This type of transaction has become a common practice when lenders want to avoid the cost of foreclosure.  A homeowner is generally able to sell their residence for more money than it would bring at a foreclosure sale.

The IRS wants taxpayers to know about the Mortgage Forgiveness Debt Relief Act of 2007.  In the waning weeks of 2007, Congress passed and President Bush signed into law this remedial legislation.  Initially limited to tax years 2007, 2008 and 2009, the law was intended to prevent debt cancellation tax for unfortunate home owners who lost their home to foreclosure.  Congress, as part of the stimulus legislation passed in 2009, extended the life of the statute through tax year 2012.  Limitations on this statute and details of debt cancellation tax will be explored in later articles.  However, it is important to note that the statute, which amended the tax code, added a specific exemption for home loans and forgiveness of debt up to two million dollars when the taxpayer’s principle residence is involved. 

It is important to note this statute only covers the principle residence or main home of the taxpayer.  A principle residence can be a house, houseboat, mobile home, co-op apartment or condominium.  Any abode that a taxpayer can call home is likely to meet the IRS standards for principal residence if that is where the taxpayer lives most of the time.  When it is a close question whether or not an abode is the principal residence of the taxpayer, the IRS will look at factors such as the following: 

1. The taxpayer’s place of employment;
2. The location of the main home for the taxpayer’s family members;
3. Taxpayer’s mailing address for bills and correspondence;
4. Addresses listed in tax returns, drivers license, car registration, voter registration;
5. The location of banks used by the taxpayer; and,
6. The location of recreational clubs and religious organizations to which the taxpayer belongs.

 The other important issue is the debt must be qualified personal residence debt.  To be “qualified” the debt must have been incurred to acquire or substantially improve the taxpayer’s personal residence.

Home foreclosure numbers are growing despite (inadequate) government efforts to stem the tide.   Due to falling prices and a floundering economy more homes are likely to be lost in the future.  The Mortgage Forgiveness Debt Relief Act of 2007 provides some relief from possible tax liability associated with foreclosure.  With this in mind, the IRS has published a list of ten facts it wants taxpayers to know about debt cancellation associated with Mortgage Foregiveness.  In the words of the IRS, direct from their website: Read the rest

An investigation into a foreclosure defense will include tracing the rights to a mortgage and its underlying promissory note.  MERS is very careful to only execute assignments of mortgages and not of notes.  I’ve never seen it assign a note, and I’m reliably informed that MERS’ bylaws prohibit it from owning rights to a note.

(A promissory note is a payment obligation, and a mortgage creates a lien which secures a note’s payment obligation.)

Sometimes a document will assign a note and a mortgage to MERS, the Mortgage Electronic Registration System.  MERS will then assign out the mortgage only, which leaves the note in limbo.

Well, actually not.  Notes cannot be enforced by an assignee; they can only be enforced by an endorsee, at least in Massachusetts.  (UCC, 3-203(c).) So a note assignment into MERS, without an assignment of the note from MERS to another entity, is a red herring.  The original note assignment into MERS had no enforceable effect.

The December report of the Congressional Oversight Panel presents a finding that the TARP (Troubled Asset Relief Program) overall assisted in preventing a bigger crisis, but it created created more challenges and encouraged risk-taking.    Earlier reports mentioned the abyssmal failure of the foreclosure prevention/mortgage modification program and the government’s awareness of this failure. The panel has made recommendations to attempt to fix the issues.   However, in the December report, the following remains a key failure:  

The foreclosure crisis continues to grow. More than two million families have lost their homes to foreclosure since the start of this crisis, and countless more have lost theirhomes in short-sales or have turned their keys over to the lender. Foreclosure starts over the next five years are projected to range from 8 to 13 million, but more than a year after the TARP was passed, it appears that the TARP’s foreclosure mitigation programs have not yet achieved the scope, scale, and permanence necessary to address the crisis. 

Executive Summary, Elizabeth Warren Introduces December Report

The growth of the crisis is no surprise to consumer attorneys; those working in the trenches see our clients’ frustrations grow daily.  The government needs to act decisively and quickly to end this crisis by forcing action from the mortgage companies with serious repercussions for those companies who continue to fail to provide permanent modifications.

Foreclosure defense requires tracing the rights to a mortgage to make sure that the foreclosing party has the right to foreclose. It also requires tracing rights to the payment obligation represented by the underlying promissory note, to insure that the foreclosing party is actually owed the money.

(A promissory note is a payment obligation.  A mortgage creates a lien which secures a note’s payment obligation and gives the right to foreclose on the lien.)

By law in most states, if not all (Uniform Commercial Code, 3-203(c)), a note cannot be enforced by an assignee. It can only be enforced by an endorsee. Read the rest

You can get rid of a wholly unsecured mortgage in a Chapter 11 or Chapter 13 bankruptcy case.  In the Eastern District of New York, you can also do this in a Chapter 7 filing.  In re Lavelle, Bankr LEXIS 3795 (Bankr SD NY 2009).

A wholly unsecured mortgage is one where there is no home value greater than an earlier mortgage.  Commonly, the value of one’s home has decreased to below the balance of the first mortgage.  This leaves a second mortgage without any home value to secure it (and a third mortgage also), so we call it an unsecured mortgage.

We’ve been able to get rid of an unsecured mortgage in Chapter 13 cases (with repayments) since the Supreme Court’s Dewsnup decision in 1992.  Courts have split on doing this in Chapter 7 (no repayments), including the 4th (MD, WV, VA, NC, & SC) and the 6th (MI, OH, KY, & TN) Circuits and other lower courts.  The 3rd Circuit (PA, NJ, & DE) has expressly left the issue open.

Sometimes, an idea is so important that it bears repeating.  My colleague Dan Press wrote on this first at our affiliated BankruptcyLawNetwork site, and more information is available there.

You can still get the tax credit for buying a new home, but time is running out.  The much heralded tax credit for new home buyers was extended in November 2009. The tax credit is available to both first-time home buyers and homeowners who have owned their home for five years.

First-time homeowners will receive an $8000.00 tax credit, so long as they purchase the home before April 30, 2010. Homeowners looking to purchase a new home that have resided in their current home for five years will receive a tax credit of $6500.00, if the purchase occurs before April 30, 2010. For current homeowners, you must have both owned and lived-in your home for at least five years to be eligible for the tax credit. Also, if you sell the new home in less than three years, you will be required to repay the tax credit.

There are some upper limits on the availability of the tax credit, both in terms of the home buyer’s income and the cost of the new home. For individuals looking to purchase a home, you will only be eligible for the tax credit if you make less than $125,000.00. If you are married, the income ceiling rises to $225,000.00. No matter whether you are buying individually or as a married couple, the home you purchase cannot cost more than $800,000.00 to be available for the tax credit.

As home prices continue to plummet, if you are going to buy, you should think seriously about purchasing before April 30, 2010.

I picked up two newspapers today and one said the housing market is coming around, and the other said foreclosures are up 15% from the same month last year.  The reality is the numbers don’t mean anything when people are losing their homes.  In January 2010, over 315,000 households in the United States received a foreclosure related notice.  We are over two years into this foreclosure nightmare, and it seems that we are still playing the numbers game. Read the rest