A loan modification that includes a reduction in the principle balance has some troubled homeowners worried about the tax consequences. Many mortgage loan modifications are featuring a reduction in the amount owed to more accurately reflect the homes current market value. Since many areas of the country have experienced severe value declines, this amount can be substantial. A loan modification can save a distressed homeowner thousands of dollars and prevent foreclosure, but what about the tax liability? Read on …
The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principle residence. Debt reduced through mortgage restructuring-loan modification-as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.
This provision applies to debt forgiven in 2007,2008 or 2009. Up to $2 million dollars of forgiven debt is eligible for this exclusion – $1 million if filing separately. The exclusion does not apply if the discharge of mortgage debt is due to services performed for the lender or any other reason not directly related to a decline in the home‘s value or the taxpayers financial condition. The amount of mortgage debt excluded will reduce the taxpayers cost basis in the home. For more detailed information, please consult the IRS website.
If you are struggling with high mortgage payments and unable to refinance or sell your home, a loan modification is an option you should consider. You lender may be willing to workout new loan terms that will lower your interest rate, lengthen the term and even reduce the principle balance to arrive at an affordable and sustainable loan payment. The Federal Government is strongly encouraging lenders to reach out to distressed borrowers to offer them a loan modification before initiating any foreclosure action. Secretary Paulson has mentioned even mandating that lenders offer systematic and streamlined loan modifications to homeowners as part of the Bailout billions. It seems that finally the government is willing to step in and force lenders to offer homeowners the help they need to stop the avalanche of foreclosures across the country.
Many of the new programs have built in timelines, so you should start learning right away about your loan modification options. You don’t want to miss out on the billions of dollars in homeowner aid. You might have been given a loan you did not understand or could not afford, but do not be afraid to contact your lender now to get the help you need. Take the time to learn about your lender’s loan modification guidelines, so you will be able to prepare an acceptable application. It is not really hard for an informed homeowner to get the loan modification help they need from their lender-with just a little knowledge and preparation you can get the help you need to save your home. An informed homeowner is difficult to use again!
