Macomb Michigan So What Happens If Mortgage Debt Relief Act of 2007 is Not Extended?

Nov. 17, 2012 - PRLog -- Today’s article we are going to take a look at if the Mortgage Debt Relief Act of 2007 is not extended past 12/31/2012. We are going to take a look at one of the other options for avoiding paying tax on the forgiven amount on a Short Sale of your property. We are going to look at specifically at insolvency: what insolvency is, and how you can apply this clause of a short sale.

Here are some examples:

Example 1. Jessica is insolvent. She does not have to pay income tax on any of the forgiven debt:
Jessica owed $300,000 on her mortgage. She could not afford to keep making her mortgage payments, but her home was only valued at $210,000. Following the short sale, she paid her mortgage off for $180,000 (after closing costs). Her lender waived the $120,000 deficiency – this means that her forgiven debt was $120,000.
Jessica was worried that she would have to pay income tax on the $120,000 – but she looked up the insolvency clause.

Immediately before the debt was forgiven, Jessica owed:
Mortgage debt: $300,000
Car loan: $12,500
Credit cards: $8,000
Student loan: $32,000
TOTAL OWED: $352,500
Immediately before the debt was forgiven, the assets Jessica owned were:
Bank account: $600
Home value: $210,000
Car (fair market value): $15,000
Household goods, clothing, etc.: $5,000
TOTAL ASSETS OWNED: $230,600
At the time that the lender waived her deficiency, Jessica owed $352,500. Everything she owned was worth $230,600. This means that she was insolvent by $122,500.
Even the amount of the forgiven debt does not bring her back to solvency. This means that she does not have to pay income tax on any of the forgiven debt.

Example 2. Bryan is insolvent, but the amount of the forgiven debt brings him back up to solvency. He must pay income tax on part of the forgiven debt.
Bryan was self-employed and owed $450,000 on his mortgage. The economic downturn caused his business to slow down, and his son required medical treatment. He could not longer afford to make his mortgage payments. But his home was now worth only $350,000.
His lender approved a short sale, accepting $320,000 net proceeds and waiving the $130,000 deficiency balance. Bryan still had outstanding medical bills to pay, so he looked up the insolvency clause.

Immediately before the debt was forgiven, Bryan owed:
Mortgage debt: $450,000
Car loan: $25,000
Credit cards: $3,000
Business debts: $40,000
Outstanding medical bills: $60,000
TOTAL OWED: $578,000
Immediately before the debt was forgiven, the assets Bryan owned were:
Bank account: $2,000
Home value: $350,000
Car (fair market value): 40,000
Household goods, clothing, etc.: $40,000
Retirement savings: $45,000
TOTAL ASSETS OWNED: $477,000
At the time that the lender waived the deficiency, Bryan owed $578,000. Everything he owned was worth $477,000. This means that he was insolvent by $101,000.

Forgiven debt is considered by IRS to be like income. Bryan’s forgiven debt of $130,000 was greater than the amount of his insolvency – so it brings him back to solvency.

The forgiven debt is exempt from income tax up to the extent of the insolvency. This means that $101,000 of the $130,000 forgiven debt is exempt from income tax. The remaining $29,000 is taxable.
To find out whether you can use Insolvency to keep from paying income tax on your forgiven debt after a short sale, download the IRS’s Insolvency Worksheet.

To find out whether you can use Insolvency to keep from paying income tax on your forgiven debt after a short sale, download the IRS’s Insolvency Worksheet. (http://www.cdtaxandfinancial.com/docs/forms/Insolvency%20...)

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Thanks for reading, Rick Giese.
Rick Giese is a real estate associate broker at RE/MAX Advisors.

Phone Toll Free: 1-800-274-5656. Email: Rick@RickGiese.com

Rick Giese specializes in loan modification assistance and short sales in the Macomb, Oakland and southern St Clair County Areas of Michigan. Macomb Loan Modification Help, Macomb Short Sale Help. Oakland Short Sale Help Macomb and Oakland County MI our services are offering sellers another option besides pre-foreclosure foreclosure or bankruptcy that can affect their credit for years. We are currently offering our services in the Richmond, Shelby Township, Macomb Township, Chesterfield Township, New Baltimore, Clinton Township, Sterling Heights, Mount Clemens (Mt Clemens) Fraser, Harrison Township, Warren, Roseville, St Clair Shores areas of Macomb County Michigan Madison Heights, Troy, Clawson, Royal Oak, Rochester, Rochester Hills, Berkley, Birmingham areas of Oakland County