Is Cancellation of Mortgage Debt A Good Thing?

Myrtle Beach HomeMyrtle Beach Home – What Happens After Debt Is Settled?

There is an assumption in today’s market that once a Myrtle Beach home is foreclosed on, the homeowner simply walks away and the remaining balance is forgiven. In some instances this is true; however, what a Myrtle Beach home owner doesn’t realize is that the amount of debt that is forgiven can be seen as taxable income by the IRS. There are exceptions to this rule, however, until a few years ago the mortgage holder was required to pay taxes on the amount forgiven by the bank. In December of 2007, a law was passed that gave some relief to troubled home owners. What you need to know is that this relief will expire on December 31, 2012 – this year.

General Guidelines for Cancellation of Dept On A Myrtle Beach Home

As a general rule, if a lender takes the action to forgive all or a portion of an individual’s financial obligation, the amount that is waived is considered taxable ordinary income. Some of the exceptions are insolvency, bankruptcy and certain other situations. You need to consult with your accountant or tax lawyer to determine if this applies to your specific situation before you consider selling your Myrtle Beach home.

Mortgage Debt – until December 31, 2012, a Myrtle Beach home owner that is forgiven on the balance of a mortgage after the home is sold will not be liable for taxes on the balance. The mortgage cannot be on a secondary residence, it must be on the primary Myrtle Beach home. The amount that is excluded from taxation must be less than the original mortgage amount plus any renovations or improvements.

Does This Law Apply Only to The Sale Of A Myrtle Beach Home?

No. In the instance of a short sale (the amount the Myrtle Beach home sells for is less than what is owed) a mortgage lender may forgive the remaining unpaid balance on the Myrtle Beach home. With a Myrtle Beach foreclosure is involved and the entire debt is forgiven. Also, in some the instance where a home owner continues to live in the home and the mortgage holder reduces the amount owed, the amount of the reduction may be considered taxable after the end of the current law.

There is a misconception that if a home owner enters into a short sale or foreclosure they have incurred a loss that can be claimed on their tax return. This simply is not true. The IRS looks upon this as a personal loss and cannot be used as a capital gains loss or a loss against ordinary income.

What About Refinanced Myrtle Beach Home Mortgages?

This law only applies in a limited set of circumstances. The relief provision only applies to refinanced mortgages that are below the original mortgage amounts plus any improvements made to the home. As a general rule, tax relief does not apply to a home equity loan or a second mortgage in instances where the funds were not used for home improvements. In these instances, the amount of the loan that is written-off or forgiven is deemed to be taxable income to the home owner.

If you are in a situation where you plan to stay in your home but the value of your Myrtle Beach home has decreased below what you owe on your home, this IRS ruling would not apply. The ruling only applies at the time of sale or foreclosure on the Myrtle Beach home or when there is a reduction in the amount owed (i.e. reducing the amount of the mortgage) with the lending institution.

Keep in mind that not all mortgage holders will forgive the debt when the value of the property declines or the Myrtle Beach home goes into foreclosure. In some instances they will institute a repayment plan especially if the Myrtle Beach home owner has other assets from which they can draw. It is totally up to the mortgage holder whether they will forgive any unpaid balance after sale.

How does the IRS know you have forgiven debt? The lending institution is required to provide the government with a 1099 showing the amount of the written-off debt. The Myrtle Beach homeowner then must file a form 982 with their next year’s tax return. The amount will then be carried over to your 1040 return as taxable income.

There are many things you need to consider before you put your home up for short sale. You will want to check with a Myrtle Beach short sale expert and with your accountant before making any final decisions.

Call us today for a consultation on how to handle the sale of your Myrtle Beach home.

Jerry Pinkas Real Estate Experts
854 Jason Blvd #G, Myrtle Beach, South Carolina 29577
(843) 839-9870

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