Tax,Law,Changes,That,Impact,Ho finance, share, loan Tax Law Changes That Impact Homeowners

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With foreclosure rates at an all time high, new tax law was passed at the end of 2007 to help homeowners avoid unmanageable income tax debt due to income created from a foreclosure. The new law also covers mortgage renegotiations and other real estate related benefits.How is income created from a foreclosure? Here is a common scenario:A lender forecloses on a property and then sells the property for less than the outstanding mortgage balance. There still remains an unpaid mortgage debt, which is the difference between the outstanding mortgage balance and the sales price. What usually happens next is the lender forgives the unpaid mortgage balance.Before the new tax law, the unpaid mortgage balance was considered taxable income leaving the homeowner with an income tax bill.After the new tax law, the unpaid mortgage balance is excluded from taxable income up to $2 million.What is a mortgage renegotiation? Before starting the foreclosure process, a lender typically performs a cost-benefit analysis of foreclosing on a property. The result may be that the foreclosure is not in the lender's best interest, which isn't uncommon since the typical foreclosure nets the lender only about 60 cents on the dollar. In this case, the lender may renegotiate the terms of the mortgage to get to a lower monthly payment for the homeowner.For example, one renegotiation workout plan organized by the Bush Administration and a group of lenders would bypass adjustable rate resets for up to five years. This type of renegotiation would typically result in forgiveness of indebtedness income creating taxable income to the homeowner if it were not for the new law.What type of debt qualifies for the exclusion? The new law applies to debt incurred for the acquisition, construction or substantial improvement of the principal residence of the taxpayer and is secured by the residence. It also includes refinancing of such debt to the extent that refinancing does not exceed the amount of the original indebtedness.What do homeowners need to watch out for? Homeowners who did "cash-out" refinancing and did not put the funds back into the home but, instead, used the funds to pay off credit card debt, tuition, medical expenses, or other expenditures. The "cash-out" amount is indebtedness income and fully taxable unless other exceptions are met.What qualifies as a principal residence? A principal residence is the one in which the taxpayer lives most of the time. However, the determination of a taxpayer's principal residence is based on "all the facts and circumstances." The definition is the same as the home sale gain exclusion.This rules out vacation homes, second residences and rental properties, even if the properties were purchased with equity from the taxpayer's principal residence.When is the new law effective? This special relief is available for three years beginning January 1, 2007, and ending December 31, 2009.What other real estate related benefits are included in the new tax law?Mortgage Insurance Deduction. The new law extends the mortgage insurance deduction to amounts paid or accrued after December 31, 2007, but only with respect to contracts entered into after December 31, 2006, or prior to January 1, 2011.Survivor's Home Sale Exclusion The new law extends the time in which a surviving spouse may use the married filing joint $500,000 home sale gain exclusion before being treated as a single individual entitled only to a $250,000 exclusion. Before the new tax law, a surviving spouse was could use the $500,000 exclusion only to the extent he or she could file a joint return with the deceased spouse's estate, which is only in the tax year the spouse dies.Starting January 1, 2008, the surviving spouse can use the $500,000 gain exclusion up to two years following the date of death of the spouse.What's the catch? As you have read, this new tax law contains major tax reductions, which are offset by several tax increases included in the new law. These increases include:An increase in the failure to file penalty for partnerships from $50 to $85 per partner per month, up to 12 monthsA new failure to file penalty for S corporations of $85 per S shareholder per month, up to 12 monthsIncreases in corporate estimated tax payments for corporations with $1 billion-plus assets, by 1.5 percent to 117.25 percent for payments due in July, August and September 2012. Article Tags: Mortgage Balance, Unpaid Mortgage, Taxable Income, Principal Residence, Home Sale, Surviving Spouse