According to a couple of articles I read in the Sunday papers this morning, the IRS has released additional guidance for homeowners that have negotiated a loan modification or short sale and need to understand how to deal with their canceled mortgage debt.
Here’s a breakdown of the key points in their latest guidance:
- First and foremost, the debt canceled by your lender must have been used by you to “to buy, build or substantially improve your main principal residence.”
- Second, you cannot deduct forgiveness on debt for second homes, investment properties, or seasonal properties you occupy for less than 6 months a year.
- Third, refinanced debt that was used for non-qualifying purposes – tuition, a new car, paying off credit card debt, etc., does not qualify.
- Finally, if you put a tenant in place and collect rent on your primary residence prior to completing a short sale or foreclosure, you could effectively convert the property to a rental and negate your ability to qualify for debt relief.
There are also maximum debt relief caps. For singles or married owners, the amount is $2 million. For married owners filing separately, the amount is $1 million.
As with everything involving the IRS, we strongly recommend you seek professional financial and/or tax advisor assistance if you are in a scenario where you might qualify for mortgage debt cancellation relief. For more information you can go to www.IRS.gov and download Form 982 and IRS Publication 4681 for additional filing details.
Gulf Coast Associates, Realtors
Bonita Springs, Florida