Well, after 11 ½ months of waiting, homeowners who had a taxable distressed housing event in 2015 can rest a little easier. What with a near-insurrection in the House of Representatives during most of the year, Obama continually taunting Congress with his executive decisions, and the administration’s faux nuclear talks with Iran, the politicians have finally settled down and gotten around to extending the The Mortgage Debt Relief Act of 2007 (“the Act”).
According to the summary provided by the House Ways and Means Committee (here), HR 2029, The Consolidated Appropriations Act, Division Q, Sec. 151, extends through 2016, the exclusion from gross income for discharge of debt related to a “qualified principal residence indebtedness”. So for folks having a 2015 debt discharge event, after receiving a 1099-C or 1099-A, they will be able to file a Form 982 for relief by April 15, 2016. For the full text of the bill, go to link here.
This recent extension also modifies the tax exclusion to principal residence indebtedness that is discharged in 2017, but only if the discharge is pursuant to a written agreement entered into in 2016.
By way of refresher, the Act permits taxpayers to exclude from gross income, debt that the lender or servicer cancelled due to a short sale, deed-in-lieu, foreclosure, or certain modifications. However there are some limitations:
- The property must have been the debtor’s primary residence;
- It must have been occupied two of the past five years;
- The borrowed funds must have been used to buy, build, or substantially improve the home; and
- The maximum amount of principal eligible for exclusion is $2 million if married, filing jointly, and $1 million, if married filing separately.
Hyperlynx suggests the following URLs for further reading:
This also includes any debt secured by a primary residence used to refinance the home mortgage, but only up to the amount of the old mortgage principal just before the refinancing. Taking cash out for any reason, e.g. debt consolidation, student loans, divorce settlement, etc. is not protected, i.e. if cancelled, it’s subject to ordinary income tax. [I suspect if the refinance funds were used to substantially improve the home, it might also be exempt if later cancelled, even though the refi funds exceeded the then-existing principal balance of original mortgage, but would verify this with a tax lawyer or CPA. I am neither.]