3 Things Every Homeowner with an Underwater Mortgage Should Know About the Debt Relief Act
Before 2007, homeowners who went through foreclosure or a short sale didn't just take a financial loss on their homes; they also were on the hook for income taxes on any debt their lender cancelled. Basically, if you owed $100,000 more than your home was worth and the bank foreclosed or you did a short sale, you'd have to pay taxes on the $100,000. (Your lender would send you a form called a 1099c recording the amount of cancelled debt, and that form also went to the IRS.) For many people, that meant tens of thousands of dollars owed at tax time – which many already distressed homeowners could hardly afford.
That all changed when Congress passed the Debt Relief Act, which allows homeowners to exclude underwater mortgage debt that was cancelled between 2007 and 2012 from their income. If you're considering taking advantage of the provisions of the Debt Relief Act, here are a few things to keep in mind: Â Â Â
1. The Debt Relief Act is set to expire on December 31, 2012. Unfortunately, the Debt Relief Act was never meant to be permanent. Homeowners who received mortgage debt forgiveness between 2007 and 2012 qualify for relief. After 2012, however, you'll have to pay taxes on any mortgage debt that your lender forgives. You should receive a 1099c form from your lender recording the total cancelled debt, and you'll have to record that amount on your tax return.Â
2. The Debt Relief Act doesn't apply to all canceled mortgage debt. To qualify for the benefits of the Debt Relief Act, the underwater mortgage must have been for your main home. Second homes and rental properties don't qualify. The cancelled debt must also be original purchase debt. Other factors can also affect whether you'll have a tax liability, and things can get complicated quickly. As part of the Homeowner 101 Underwater Homeowners Assessment and Action Plan, we use a decision matrix to help determine whether you could have a tax liability because of a short sale or foreclosure. Â
3. You need to act now if you want to take advantage of the Debt Relief Act. Both foreclosures and short sales can take months to finalize. But if you want to take advantage of the debt forgiveness benefits of the Debt Relief Act, you need to have everything completed by December 31, 2012. Since you can't always control how fast the foreclosure or short sale process moves, it's better to get started sooner rather than later.
Some homeowners who are underwater on their mortgage can really benefit from the Debt Relief Act. But that doesn't mean that a foreclosure or short sale is right for your situation. To get the answers, information and resources you need to move forward, we've created the Underwater Homeowners Assessment and Action Plan, which can help you evaluate your options and make a choice that's best for you and your family. \
Homeowner 101 is an organization designed to give underwater homeowners Answers, Information, and Resources (A.I.R.). We offer the Underwater Homeowners Assessment and Action Plan, a resource for every homeowner who owes more than her house is worth – whether you're having trouble making your mortgage payment or not.
That all changed when Congress passed the Debt Relief Act, which allows homeowners to exclude underwater mortgage debt that was cancelled between 2007 and 2012 from their income. If you're considering taking advantage of the provisions of the Debt Relief Act, here are a few things to keep in mind: Â Â Â
1. The Debt Relief Act is set to expire on December 31, 2012. Unfortunately, the Debt Relief Act was never meant to be permanent. Homeowners who received mortgage debt forgiveness between 2007 and 2012 qualify for relief. After 2012, however, you'll have to pay taxes on any mortgage debt that your lender forgives. You should receive a 1099c form from your lender recording the total cancelled debt, and you'll have to record that amount on your tax return.Â
2. The Debt Relief Act doesn't apply to all canceled mortgage debt. To qualify for the benefits of the Debt Relief Act, the underwater mortgage must have been for your main home. Second homes and rental properties don't qualify. The cancelled debt must also be original purchase debt. Other factors can also affect whether you'll have a tax liability, and things can get complicated quickly. As part of the Homeowner 101 Underwater Homeowners Assessment and Action Plan, we use a decision matrix to help determine whether you could have a tax liability because of a short sale or foreclosure. Â
3. You need to act now if you want to take advantage of the Debt Relief Act. Both foreclosures and short sales can take months to finalize. But if you want to take advantage of the debt forgiveness benefits of the Debt Relief Act, you need to have everything completed by December 31, 2012. Since you can't always control how fast the foreclosure or short sale process moves, it's better to get started sooner rather than later.
Some homeowners who are underwater on their mortgage can really benefit from the Debt Relief Act. But that doesn't mean that a foreclosure or short sale is right for your situation. To get the answers, information and resources you need to move forward, we've created the Underwater Homeowners Assessment and Action Plan, which can help you evaluate your options and make a choice that's best for you and your family. \
Homeowner 101 is an organization designed to give underwater homeowners Answers, Information, and Resources (A.I.R.). We offer the Underwater Homeowners Assessment and Action Plan, a resource for every homeowner who owes more than her house is worth – whether you're having trouble making your mortgage payment or not.
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