Posted on: 21st May, 2008 11:20am
The Mortgage Debt Forgiveness Tax Relief Act has been effective in California since mid 2008. It offers tax break on canceled debt or deficiency (in short sale or foreclosure).
California law applies to qualified debt forgiven in 2007 and 2008. It limits:
The debt relief is limited to:
Federal Mortgage Debt Relief Act applies to qualified debt forgiven right from 2007 to 2012. Recently Mortgage Forgiveness Debt Relief Act was extended through 2013 so as to avoid the serious consequences of fiscal cliff. It limits:
The Federal law does not limit the debt relief amount. It only limits the amount of indebtedness used to find out the debt relief amount.
For further information, you may refer to the following resources:
Debt Relief Act - how it applies to short sale/foreclosure
If you're unable to afford the current mortgage payments, and it isn't possible to refinance with FHA Secure, then you may consider going for a short sale. A short sale is quite common in a declining market where the home sale price isn't enough to cover the outstanding balance on your mortgage. In such a situation, you have a personal liability to pay off the remaining balance on your loan.
Let's say, your lender accepts a short sale, and there's a combined mortgage (purchase loan and second mortgage) on your home. Now, the lender may not ask for the deficiency (difference between unpaid loan balance and price at which lender sells off your property) on the primary mortgage. This is due to the Anti-deficiency laws applicable to mortgages on a primary residence. But, such laws are not applicable in case of second mortgages. Therefore, you can avoid paying deficiency on the first but not on the second.
Now, if it is a refinance loan, the lender will ask for the deficiency if the short sale doesn't yield much to cover the combined debt (purchase loan and refinance mortgage). In case you fail to pay the deficiency, the unpaid amount is considered as income and the IRS requires you to pay federal income tax on the unpaid debt unless you don't qualify for mortgage tax relief under the Federal Mortgage Debt Relief Act (Mortgage Forgiveness Debt Relief Act of 2007). However, the Mortgage Debt Forgiveness Tax Relief Act can help you with tax relief only under certain conditions.
The Mortgage Debt Relief Act applies even if your property is foreclosed and there's a deficiency amount left to be paid. However, if you opt for a deed-in-lieu, the lender may not ask for a deficiency in most cases, as is the general rule.
Earlier the Mortgage Debt Relief Act applied to all states except California. However, it is now applicable to California also with some difference in the rules as compared to the Federal Law.
Let's say, your lender accepts a short sale, and there's a combined mortgage (purchase loan and second mortgage) on your home. Now, the lender may not ask for the deficiency (difference between unpaid loan balance and price at which lender sells off your property) on the primary mortgage. This is due to the Anti-deficiency laws applicable to mortgages on a primary residence. But, such laws are not applicable in case of second mortgages. Therefore, you can avoid paying deficiency on the first but not on the second.
Now, if it is a refinance loan, the lender will ask for the deficiency if the short sale doesn't yield much to cover the combined debt (purchase loan and refinance mortgage). In case you fail to pay the deficiency, the unpaid amount is considered as income and the IRS requires you to pay federal income tax on the unpaid debt unless you don't qualify for mortgage tax relief under the Federal Mortgage Debt Relief Act (Mortgage Forgiveness Debt Relief Act of 2007). However, the Mortgage Debt Forgiveness Tax Relief Act can help you with tax relief only under certain conditions.
The Mortgage Debt Relief Act applies even if your property is foreclosed and there's a deficiency amount left to be paid. However, if you opt for a deed-in-lieu, the lender may not ask for a deficiency in most cases, as is the general rule.
Earlier the Mortgage Debt Relief Act applied to all states except California. However, it is now applicable to California also with some difference in the rules as compared to the Federal Law.
California Debt Relief Act and the Federal law - how they differ
California law applies to qualified debt forgiven in 2007 and 2008. It limits:
- Amount of qualified principal residence indebtedness up to $800,000 for married/registered domestic partners filing jointly or as single, head of family or as widow/widower.
- The amount of principal residence indebtedness up to $400,000 for married/registered domestic partners filing separately.
The debt relief is limited to:
- $250,000 for married/registered domestic partners filing taxes jointly, single, head of family or as widow or widower.
- $125,000 for married/registered domestic partners filing their tax returns separately.
Federal Mortgage Debt Relief Act applies to qualified debt forgiven right from 2007 to 2012. Recently Mortgage Forgiveness Debt Relief Act was extended through 2013 so as to avoid the serious consequences of fiscal cliff. It limits:
- Amount of qualified principal residence indebtedness up to $2,000,000 for married/registered domestic partners filing jointly or as single, head of family or as widow/widower.
- The amount of principal residence indebtedness up to $1,000,000 for married/registered domestic partners filing separately.
The Federal law does not limit the debt relief amount. It only limits the amount of indebtedness used to find out the debt relief amount.
For further information, you may refer to the following resources:
Has this Act taken affect in California yet?
Thanks
Thanks
Once the second mortgage lender has charged off the loan, he won't be able to foreclose the property. The CA will come after you in order to recover the rules. However, there actions will be guided by the FDCPA rules. In order to garnish your wages, your CA will have to file a lawsuit against you and get a judgment.
Debt forgiveness is a fantastic thing for many people, as it means less than the whole of a debt has been compensated though the debt has been satisfied. However, it's considered taxable income and the mistake of a debt forgiveness tax break for foreclosures or short sales of homes is set to bite some taxpayers.
Our home was foreclosed four years ago. We also had a second mortgage. To this date we have never received a late notice or bill on the second mortgage and assumed it was settled in the foreclosure. Today we received a bill saying it is 46 months past due and they have sold it to a collection agency. We live in California. Do we have to pay this second mortgage now after all this time??
Hi ishikawa,
If the second mortgage lender did not get back his dues after the foreclosure sale, then he can come after you to recover it. You will be liable for paying off the dues.
If the second mortgage lender did not get back his dues after the foreclosure sale, then he can come after you to recover it. You will be liable for paying off the dues.