Mortgage Law Network

Missing Name in Notary Acknowledgment Really Means Bad Mortgage in Massachusetts

L. Jed Berliner, Marlborough & Springfield, MA Foreclosure Defense Attorney — Sat, 20 Mar 2010 01:51:36 +0000

“Money moves electronically, but paper moves at human speed.” I wrote that back in August to introduce a new decision that allowed a bankruptcy trustee to set aside a mortgage under Massachusetts law, where the name was missing from the notary’s acknowledgment.

The borrower had signed the mortgage, but the notary public was hurried and didn’t write in the name where it belonged a second time.

That case has been affirmed on appeal, and the lender paid $120,000 to the trustee to keep the mortgage. Wow !! Good news for the trustee. Neutral for the borrower, as nothing in the decision voided the enforcement of the mortgage against the borrower.

Creative, crafty attorneys can work up an advantage from this. I won’t say any more in public . . .

Tax Fact 10-Mortgage Debt Forgiveness: Forms 1099-A and 1099-C

Kent Anderson, Oregon Bankruptcy Attorney — Fri, 19 Mar 2010 21:15:07 +0000

If your home is foreclosed, sold at a short sale, or if you give the home back to your lender in satisfaction of your debt, IRS Tax Fact 10 tells us to watch for a 1099-C or 1099-A statement in the mail during the next calendar year. Lenders are required to send the 1099 forms by the last day of February in the year following the tax year in which debt cancellation or forgiveness occurs. When you get the 1099-C, look at it carefully. If you think something is wrong on the notification, call the lender who issued the statement and see if you can get them to correct it. This is easier said than done but the IRS recommends that you take this course of action.

When looking at a Form 1099 that involves debt cancellation, you should pay particular attention to the amount of debt listed as forgiven in box number two as well as the value listed for your home in box number seven. The amount of debt forgiven should be the value of your home at the time the debt was cancelled subtracted from the amount of debt you owed. If either of those numbers are wrong, you could end up paying more tax than you owe.

Remember, if you received a 1099-C as a result of a foreclosure, short sale or deed in lieu of foreclosure, the amount reported as cancelled debt will be considered as income unless you file a Form 982 with your federal tax return. A copy of your 1099 is sent to the IRS and a computer will match it against your return after it is filed. If there is a mismatch, you may be sent a Form CP2000 letter suggesting that you owe more tax.

If the numbers on a 1099 are incorrect, there are some procedures by which you can contest the error. If the 1099 was sent by someone with intent to harm you, federal law allows you to collect statutory damages and attorneys fees if you must go to court. Tax professionals know how to deal with erroneous 1099 reports. If you are unable to convince your lender to correct the 1099, it is time to see a tax lawyer for help.

Tax Fact 9-Make Sure Address Current With Mortgage Lender

Kent Anderson, Oregon Bankruptcy Attorney — Thu, 18 Mar 2010 21:10:13 +0000

Most home lenders, banks and government agencies are required to notify you and the IRS if they cancel all or a part of your debt. This is done by the issuance of Form 1099-C or, at times, Form 1099-A. By law, these forms must show the amount of debt forgiven and the fair market value of any property involved. For this reason, Tax Fact 9 points out that it is important that you make sure your home lender has your current address, even after foreclosure. If you have been foreclosed, it is likely you will have moved out of your home and have a new mailing address. The post office will forward your mail, if you ask them to do so, for six or twelve months depending on the type of request you make. However, the system is not perfect and you may not get the notice if it is sent to the wrong address.

If your home loan is foreclosed or you otherwise have debt that is cancelled, it is best if you notify the bank or home lender of your new address. This way important tax information that has been sent to the IRS will also get to you and will not be subject to possible loss in the mail.

Even if you think your home was worth more than the amount you owed the lender at the time of the foreclosure sale, the lender may come to a different conclusion. If your lender sends you a 1099-C that shows cancelled debt, this is the information that the IRS will receive. If you fail to deal with it on your tax return, you may end up being assessed additional tax.

Tax Fact 8-Mortgage Debt Forgiveness for Property Not Principal Residence

Kent Anderson, Oregon Bankruptcy Attorney — Wed, 17 Mar 2010 20:57:43 +0000

As you know from the previous “Tax Facts”, when mortgage debt is forgiven, it can be excluded from income if it is qualified principle residence debt, and you know that a qualified principal residence must be the main home of the taxpayer. What happens to mortgage debt that is cancelled on a second home, rental property, or business property? Can this too be excluded from income under the Mortgage Debt Relief Act of 2007? IRS Tax Fact 8 makes it clear that the answer is no.

When debt is forgiven on a second home, rental property, business property or for debts such as credit cards or car loans, the Mortgage Forgiveness Debt Relief Act of 2007 does not apply. The exclusion for insolvency, qualified business property, or even bankruptcy may apply. However, timing is important. The instructions for IRS Form 982 explain how to use these and other exceptions to the tax on cancelled debt. However, a trip to a CPA, Enrolled Agent or other tax professional may be wise in these circumstances.

Most taxpayers do not even know that debt cancellation can result in taxable income. The tax code can be complicated and filled with exceptions to the rules it states. If you have cancelled debt in the tax year, be careful with your tax return or you may get a letter from the IRS claiming you owe more tax than was calculated on the return.

Tax Fact 7-IRS Form 982 is Important

Kent Anderson, Oregon Bankruptcy Attorney — Tue, 16 Mar 2010 20:45:28 +0000

The IRS wants you to know, in Tax Fact 7, that you must use Form 982 in order to claim that forgiven mortgage debt should not be included in your income for tax purposes. IRS Form 982, entitled “Reduction of Tax Attributes Due to Discharge of Indebtedness” must be attached to your federal income tax return for the tax year in which the qualified debt was forgiven. Despite the lengthy and confusing form name, the form itself is only one page long. It comes with detailed instructions that have examples of how the form should be used. Form 982 can be found on the IRS website.

If you have cancelled debt and do not file a Form 982 with your tax return, or do not otherwise report the income from mortgage debt forgiveness or other cancelled debt on your tax return, the IRS may write you a letter and propose the assessment of additional tax. A failure to respond to such an IRS letter within 30 days will result in an issuance of a Statutory Notice of Deficiency, and the assessment of additional tax. Look for my article on responding to IRS notices for what you need to do if the IRS tries to tell you, you owe more tax.

The business about tax attributes is serious. While the Mortgage Forgiveness Debt Relief Act of 2007 does give a foreclosed homeowner the ability to exclude certain types of cancelled debt from income, there can be a price to pay. For this reason, and many others, it may be appropriate to consult a tax professional if a foreclosure occurs in the year for which the return is being prepared. Watch out for a 1099-A and/or 1099-C from the lender indicating that debt was cancelled.

Tax Fact 6-Cancelled Debt From a Refinance Can Be Taxable Income

Kent Anderson, Oregon Bankruptcy Attorney — Mon, 15 Mar 2010 20:39:54 +0000

In explaining tax on mortgage debt forgiveness, the IRS stresses, as tax fact number 6, that proceeds of refinance debt used for purposes, other than buying, building, or making a substantial improvement in the principle residence, do not qualify for exclusion from income if the debt is cancelled. This can be important. Many lenders require home owners to payoff outstanding credit card debt when they refinance their home. This made sense to the lender, in that it would be easier for the homeowner to make the required house payments if they did not have to pay other debt. However, money used to payoff credit card debts is not “qualified” for exclusion from income under the Mortgage Forgiveness Debt Relief Act of 2007.

Also it should be noted that funds from a refinance used to pay college tuition do not qualify for the exclusion. Many parents borrowed against their homes to fund college education for their children. Despite the noble intent, Congress did not see fit to exclude debt incurred for this purpose from inclusion as taxable income if the debt is cancelled. This does not mean you have to pay tax if you borrowed money against your home to pay for a college education. However, if your home is foreclosed and the value of your home at the time of foreclosure is less than the amount of the debt, and a portion of that debt was used for a purpose other than buying, building or substantially improving your home, the amount cancelled may be taxed as income.

This series of articles focus on the Mortgage Forgiveness Debt Relief Act of 2007 and how it may avoid a tax liability. In addition to this statutory exclusion from income for tax purposes, there are other exclusions that could apply. For example, bankruptcy discharge or insolvency at the time the debt was cancelled could exclude some or all of the debt that has been cancelled from income for tax purposes.

Tax Fact 5-Refinance Debt for Improvements is Excludable

Kent Anderson, Oregon Bankruptcy Attorney — Sun, 14 Mar 2010 20:24:45 +0000

IRS tax fact number 5 tells us that refinanced debt proceeds used for the purpose of substantially improving your personal residence qualify for exclusion from income if the debt is later is cancelled. In other words, if you re-finance your principal residence home mortgage and use the excess funds (the portion not used to pay off your old mortgage) for substantial improvements to your home, any of that debt, if cancelled, qualifies for the exclustion. The use of loan proceeds is clearly important in determining whether or not later debt cancellation results in taxable income.

If a foreclosure occurs or mortgage debt is forgiven in some other way, it is important to pay attention to what type of debt was involved. If the money was used to buy, build, or substantially improve the principle residence of the taxpayer, it qualifies for exclusion of the Mortgage Forgiveness Debt Relief Act of 2007. If the debt and the money was used to pay off the original loan it is also subject to exclusion from income if it is cancelled. Finally, even if new money comes out of a refinance loan, as long as that money is used to make a substantial improvement in the home, it becomes “qualified principle residence debt” and is excludable from income. This statutory exclusion from income is scheduled to expire December 31, 2012.

Tax Fact 4-Only Certain Mortgage Debt Qualifies For Exclusion

Kent Anderson, Oregon Bankruptcy Attorney — Sat, 13 Mar 2010 23:55:43 +0000

Mortgage debt forgiveness is considered to be income unless it is excluded. Principal residence debt has its own exclusion from income if it is cancelled or forgiven by the lender. To “qualify” it must be what is defined by the Internal Revenue Service as “qualified principal residence debt”. The debt must have been used to buy, build or substantially improve the principal residence of the taxpayer and the home must act as security for the debt.

With the substantial increase in home prices that occurred over the ten years beginning in 2000, many people sought to access this “residential piggy bank” by refinancing their home. Often, the funds borrowed in such a refinance were used to pay bills unrelated to the principal residence like credit card debt. The IRS will not allow the use of that “residential piggy bank” money for general consumer expenditures. If the money is not spent on the principal residence, the taxpayer will not be permitted to exclude it from income if the debt gets cancelled. If the money is used for some purpose other than buying, making a substantial improvement or building your home it is not “qualified” for the exclusion allowed by the Mortgage Forgiveness Debt Relief Act of 2007.

It is important to note that borrowing against a home does not create a tax liability in and of itself. A taxpayer can borrow against a principal residence and use that money for any purpose. However, if the debt is cancelled, that portion of the debt secured against the home and used for purposes other than paying off existing debt that is “qualified” would constitute taxable income unless it is otherwise excluded.

In most cases, if a home equity line of credit is cancelled in whole or in part, by foreclosure, short sale or restructuring, the amount cancelled or forgiven will be considered income in the year in which the cancellation occurred. The Mortgage Forgiveness Debt Relief Act of 2007 will not exclude any portion of the home equity line of credit unless it too was used for substantial improvement of the home. However, there are other exclusions that may apply.

Tax Fact 3-Debt Cancelled through Mortgage Restructuring is Eligible

Kent Anderson, Oregon Bankruptcy Attorney — Fri, 12 Mar 2010 23:53:34 +0000

The IRS, in listing ten important facts about mortgage debt forgiveness, points out that debt on a principal residence that is cancelled by restructuring the loan in cooperation with the lender can exclude it from taxable income. Subject to the two million dollar limit on the Mortgage Forgiveness Debt Relief Act of 2007, a write down of the balance due to a lender, which can cause cancellation of debt, may qualify for exclusion of that debt cancellation from income.

With the government sponsored Home Affordable Modification Program (HAMP), modifications are beginning to pick up speed which means mortgage restructuring may become a more common occurrence. Some lenders have established their own programs for modifying home loans. Whether or not a government program is involved, any write down of the qualified principle resident’s debt can qualify for exclusion from income.

It is important to realize that debt cancellation occurs when a lender forgives a portion of its debt. The failure to take this into consideration could result in a letter from the Internal Revenue Service demanding the payment of more tax. Find out what to do if you get that type of letter in my article on responding to the IRS notice that you owed tax from debt cancellation income.

Tax Fact 2-Mortgage Debt Forgiveness Exclusion Financial Limits

Kent Anderson, Oregon Bankruptcy Attorney — Thu, 11 Mar 2010 23:46:20 +0000

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.