Magnolia Realty's Auburn Area Real Estate Update: IRS is Not Taxing Mortgage Forgiveness on a Temporary, Limited Basis

As part of President Obama’s legislation, the IRS is not taxing mortgage forgiveness on a temporary, limited basis. The current tax code states that any mortgage forgiveness in excess of $600 will be reported to the IRS as ordinary taxable income. So, if the taxpayer received a $20,000 mortgage balance reduction, the IRS would ordinarily tax that $20,000 as income. In order to qualify for this tax exclusion, the principal reduction (if keeping the home) or the sale amount (if selling the home as a short-sale) must be strictly made on primary residences – investment properties and second homes do not qualify. Refinanced mortgages on primary residences also qualify assuming the homeowner refinanced the actual mortgage balance or if the homeowner did take cash out, it was to make home improvements. Refinanced mortgages where cash was taken out for that luxury vacation or new car do not qualify. Of course, home improvement purchases will need to be well-documented. And, if the homeowner receives mortgage reduction and continues to reside in the home, the IRS will require the homeowner to lower his cost basis.Please bear in mind; this is at the federal level. Consult your tax advisor for information on how this applies to you.If you want to claim the debt forgiveness, please visit www.irs.gov and download Form 982. Again, this is temporary tax relief. It is set to expire at the end of 2012.