With tax season fast approaching, the Internal Revenue Service has begun a campaign to help taxpayers deal with the tax consequences of the bad economy. The agency's Web site prominently features an article entitled "The 'What Ifs' of an Economic Downturn," which collects common questions from taxpayers dealing with job losses, high debt and other financial problems. Among those questions are several that are important to our La Habra mortgage loan modification clients -- questions dealing with foreclosure, short sales, debt forgiveness and bankruptcy.
As we've written before, the IRS considers canceled debt a type of income, which means you will be taxed if your mortgage lender agrees to forgive part of the principal of your home loan as part of a mortgage loan modification, refinancing or foreclosure. You'll know for sure if you get a 1099-C document from the lender showing the amount of the canceled debt. Luckily, Congress gave homeowners some relief in 2007 with the Mortgage Forgiveness Debt Relief Act, which allows homeowners to exempt cancellation of mortgage debt "income" from their taxable income. To qualify, the home must be your primary residence and the canceled debt can't go above $1 million to $2 million, depending on your filing status.
If you don't qualify under that law, you may still be able to exclude your canceled debt from your income by showing the IRS that you are insolvent. Insolvency means that your total assets (the money and property you own) are less than your total liabilities (debts and other legal obligations to pay, such as child support). This might be the right choice for people with certain farm or business debts, as well as people who use Southern California debt settlement services to end overwhelming debts. The bad news is that you can't claim any losses related to a foreclosure or short sale on your income taxes as a capital loss, because personal property is excluded from the capital gains tax rules.
These rules don't apply to people who have filed for bankruptcy -- in a consumer bankruptcy, the IRS doesn't consider forgiven debt part of your income. However, our Diamond Bar bankruptcy lawyers remind clients that bankruptcy creates lots of other special tax situations. Possibly the biggest is that your bankruptcy estate is technically a different person from you for tax purposes, which means it needs a separate tax return. And of course, tax debts from previous years aren't dischargeable in a bankruptcy.
At Howard Law, we help clients find the best way out of their overwhelming debts -- whether that means mortgage loan modification, debt settlement or even bankruptcy. We also help victims of predatory mortgage lending sue to stop their unfair contracts and protect people who are being harassed by debt collection agencies in violation of the Fair Debt Collection Practices Act. Our Anaheim mortgage loan modification lawyers work with clients' lenders to negotiate substantial changes to their mortgages, lowering payments and allowing clients to keep their homes. If you know you can't keep up with your mortgage payments and you're ready to get help, we offer free, confidential consultations. To set one up, please contact us online or call us toll-free at 1-800-872-5925.