Posted by John/CT on 10/28/08 2:34pm
Msg #268464

A New Twist ...

Last nite I conducted an FHA refi signing where the borrowers had negotiated a payoff on their current mortgage to be $40,000 less than their actual unpaid balance. Apparently in this case the current mortgagee was going to report the borrowers’ “forgiven” $40K as taxable income to them on an IRS Form 1099. This, BTW, may be something we’ll be seeing more of in the future. The borrowers’ attorney (who was also in attendance) said if the current lender does not give them a letter during their rescission period confirming they would not have to pay income tax on this money, he is advising them to cancel the loan. All of a sudden warning bells went off in my mind: From now on … just to be on the safe side … I’m gonna’ make sure I confirm on all future assignments that I will be paid my full fee, whether the loan funds or not. Something I’ve been pretty lax about in the past, but no more.

Reply by Bob_Chicago on 10/28/08 3:05pm
Msg #268469

Not legal advice, yada yada, but IMO , under the current...

tax law, that letter from the current lender, stating that the
forgiveness of debt is not taxable, should be written
on very soft paper. Wouldn't want them to get a rash.

Reply by Lee/AR on 10/28/08 3:06pm
Msg #268471

Thanks for the heads up....

I usually do ask their no/sign/show & rescind fee (& tell 'em mine), but... sometimes I forget. This could get to be a real problem, tho'. Appreciate the post.

Reply by ReneeK_MI on 10/28/08 3:11pm
Msg #268473

not new, but definitely a twist of the knife, eh?

I thought there was new legislation ... found this snip-it on Inman from last year, but no time right now to pursue further:


"Congress did succeed in passing legislation that would provide tax breaks for some homeowners with private mortgage insurance, and exempt debt forgiven in a foreclosure, short sale or workout from being classified as taxable income. "

Reply by ReneeK_MI on 10/28/08 3:14pm
Msg #268474

info on that legislation, found this...

http://www.inman.com/news/2007/12/3/congress-oks-tax-relief-forgiven-mortgage-debt

From 12/07, pretty detailed. Maybe someone can explain this to us?

Reply by John/CT on 10/28/08 3:48pm
Msg #268478

Mortgage Forgiveness Debt Relief Act

Thanx for the lead, Reneek. This is what I found at http://www.irs.gov/irs/article/0,,id=179073,00.html. Looks like a non-issue for me now

Reply by Maureen_nh on 10/28/08 10:00pm
Msg #268498

Re: Mortgage Forgiveness Debt Relief Act

Am I reading this correctly?
Not asking for legal, just what your take on it is.
The taxes would be forgiven if you, for instance, used the money for a new garage, kitchen,
landscaping etc but not for financing your vehicles or a cruise.
I would hope some provision would be made for people with loss of work or medical bills due to illness or injury.

Reply by MikeC/NY on 10/28/08 10:49pm
Msg #268508

Re: Mortgage Forgiveness Debt Relief Act

The main purpose of the act is to deal with short sales and foreclosures - in both cases, the homeowners walk away with nothing, so it's not a case of what they will do with the money because there is no money available to them... The lender gets it all and forgives the difference, and the former homeowner doesn't have to pay taxes on that difference. Before this law was passed, the IRS considered the difference to be taxable income and the lender could still go after the former owner for the deficiency, so people caught up in this were getting nailed from all sides.

If someone is able to refi and have some of the mortgage forgiven, the same rules apply - it's a portion of debt that's forgiven, with no taxes incurred. They DO NOT have access to funds they can use for other things - it's not like they suddenly have additional equity that they can tap.

Reply by Maureen_nh on 10/29/08 6:33am
Msg #268524

Re: Mortgage Forgiveness Debt Relief Act

Sorry Mike, I did not make myself clear.
I meant the monies in the original loan, not the forgiven debt.
i.e. loan was used to improve the property, not to pay off consumer debt.

Reply by Bob_Chicago on 10/28/08 10:30pm
Msg #268503

Learn something new every day n/m

Reply by Pat/CA on 10/28/08 10:43pm
Msg #268506

IRS Pub 4681-Canceled Debts, Foreclosures, Repossessions,

and Abandonments. I think this link will also help but also keep in mind (I think) there's more changes being made right now with the bailout. To date however, this is the most recent info I have.

http://www.irs.gov/pub/irs-pdf/p4681.pdf (Pub 4681)

Also, here's a link to the form itself (Form 982-Reduction of Tax Attributes Due to Discharge of
Indebtedness (and Section 1082 Basis Adjustment):

http://www.irs.gov/pub/irs-pdf/f982.pdf

I realize it's not necessary to know this for our NSA business, but we also may know of some people, or meet them in our work who could benefit from this info.

Hope this helps.

Reply by John/CT on 10/29/08 9:45am
Msg #268539

Re: IRS Pub 4681-Canceled Debts, Foreclosures, Repossessions,

Well, having the Debt Forgiveness information has proven very important to me as an NSA. Remember when I opened this thread with what the borrowers' attorney said? He was unaware of the Act, and when I provided him the information that would allow his clients to "escape" the threat of tax on their $40K he was very thankful. Sure enhanced my credibility in his eyes, which may or may not result referrals in the future. And ... who knows, I may end up being a "fly on the wall" again.