Signals continue to be mixed in the housing industry.
More housing markets across the United States are showing signs of picking up, although most real estate observers caution that the recovery will be long and slow.
Home builder stocks have are up dramatically as the annual spring home-buying season begins. But February's numbers on sales of previously owned homes were disappointing.
That's why, says Rep. Charles Rangel, the Mortgage Forgiveness Debt Relief Act needs to be extended.
This law, enacted on Dec. 20, 2007, allows certain homeowners to avoid taxes on the portion of a mortgage that is partly or entirely forgiven when the lender restructures the loan or the property goes into foreclosure.
The homeowner debt relief law was originally set to expire at the end of the 2009 tax year. But before we ever got to that calendar, Congress extended the canceled mortgage debt relief bill through 2012.
Rangel, a former Democratic Ways and Means Committee chairman from New York, now wants to see the measure stay on the tax books for two more years.
"The sanctity of our homes is at the heart of the American Dream," said Rangel in a statement announcing the introduction of H.R. 4202.
"The collapse of the American housing market that began in late 2006 has brought our economy to its knees and left Americans from all walks of life without a home or struggling to keep a roof over their head," said Rangel. "While the law cannot repair the borrowers' credit or punish those who misled them into taking out inappropriate loans, it addresses a fundamental unfairness in the lives of those who find themselves in these dire circumstances."
Keeping the mortgage debt relief act around through 2014 would help the approximately 12 million Americans on the verge of losing their homes because they owe more money than their home is worth, said Rangel.
Fourteen other House Democrats have signed as cosponsors to H.R. 4202. So far, there are no Republican Representatives supporting the bill.
A terrible tax surprise: Canceled debt has long been a nasty tax surprise.
In most situations, when a creditor writes off, or forgives, a loan, the amount of the canceled debt is considered taxable income to the person getting the payment relief.
You'll know you need to report the income when you get a Form 1099-C, Cancellation of Debt, showing any forgiven debt amount.
Untaxable canceled debt situations: In addition to folks who qualify for tax-free canceled debt relief under the Mortgage Forgiveness Debt Relief Act, there are a few other ways to eliminate or reduce debt and not owe Uncle Sam.
The bad news is that in most of these cases, you'd rather not be in the financial straits required to escape IRS collection.
Canceled debt is excluded from your gross income when it is:
- The aforementioned principal residence debt relief,
- Debt canceled in a Title 11 bankruptcy case,
- Debt canceled during insolvency,
- Canceled because of qualified farm indebtedness, or
- Canceled due to qualified real property business indebtedness.
As I've mentioned before, business taxes aren't in my tax wheelhouse so I'll leave it those of you who think situations 4 and 5 might apply to find a business tax specialist.
Chapter 11 bankruptcy is primarily for the reorganization of heavily-indebted businesses. It's usually associated with corporations, but can be filed by small businesses and, in rare cases, individuals.
My previous professional help advice applies here, too. If you're considering bankruptcy, either in connection with your business or a personal filing, get yourself a bankruptcy lawyer.
Insolvency issues: Insolvency is a bit less complicated. You're insolvent when you don't have enough assets to pay your outstanding debts. We've probably all been there at some point, although when you're an insolvent college kid you don't tend to worry about it as long as you're on good terms with mom and dad.
But when you're out on your own and find yourself without enough money to pay your bills, you'll need to work with your creditors to come up with some sort of payment plan and/or have the debt, or at least part of it, forgiven.
If you can show the IRS that you were insolvent just before the cancellation of the debt, that forgiven amount (or the amount up to your insolvency level) won't count as income.
You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own: your car, house, condominium, furniture, life insurance policies, stocks, other investments and even your pension and other retirement accounts.
The IRS has an insolvency worksheet to help you see where you stand.
If you do qualify for nontaxable canceled debt, you'll need to file Form 982.
You also can find more details on and examples of the tax treatment of debt in IRS Publication 4681.
Here's hoping that you are successful in getting your debt circumstances straightened out and that you don't have added burdens in dealing with any subsequent tax issues that arise.
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