Mortgage Rate News

Tax relief continues for homeowners in various forms for this 2007 tax season. Mortgage debt forgiveness is no longer considered income, and there have been some other points that should be made concerning tax relief. Look below and see if you can benefit from your private mortgage insurance premiums — or even from financial insolvency.

Private mortgage insurance

If you buy a home with less than 20 percent down, most mortgage lenders require you to get private mortgage insurance (PMI). A couple of years ago, new tax rules made it so that PMI premiums could be deducted like mortgage interest paid. However, these provisions were set to expire this year. Instead, the provision has been extended.

Insolvency can help you gain tax relief on a short sale

For homes facing foreclosure and homeowners hoping to avoid it with a short sale, the mortgage debt forgiveness tax rule doesn’t apply. Instead, homeowners in this position can prove that they are insolvent in order to avoid paying income tax. Inman News explains how to figure insolvency:

To figure out whether you’re insolvent (for IRS purposes) Burgess suggests using form 433F, which is the “Collection Information Statement.” (Download IRS forms for free at www.IRS.gov.) One side of the form lists all of the assets and debts. The other side lists monthly income and expenses. You can fill out the form online and then print it, or print first and work on it by hand. …

Add up all of your assets and then all of your debts. If your debts exceed your assets, you are insolvent by that amount. In other words, you’ve calculated your net worth, and come up with a negative number.

Before you file your taxes, realize that there are a number of new tax relief measures for the 2007 tax season. Either visit the IRS Web site for information or consult a tax attorney or accountant.

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For some reason, the government has been counting debt forgiveness as income. Inman News explains how this whole debt forgiveness as income used to work:

In other words, if your lender forgave $20,000 in mortgage debt because your house was worth $20,000 less than your mortgage balance, the IRS treated this debt forgiveness the same as income that you earned from your job — and required you to add $20,000 in phantom income to the amount of your annual income and pay tax on it at your marginal tax rate.

This was a bit odd. Since if your home had declined in value, there are obviously other market factors at play. If you can’t pay your home mortgage loan, how are you to afford the income tax? The other obvious incongruity is that mortgage debt forgiveness is not the same thing as actually being handed a check. You don’t actually see the money, and it doesn’t help you in any of the ways you expect from income. So collecting income tax on it seems…wrong.

That is now being remedied. Sort of. Starting this tax season and lasting through 2009, you don’t have to pay income tax on mortgage debt forgiveness. There are rules to this tax relief plan, though. The home has to be a primary residence, and things like debt forgiveness on money you took out as part of a refinance or home equity loan (unless you can prove the money was used for home improvement) doesn’t count, either.

So talk to your tax preparer or an accountant. Or visit the IRS Web site. Figure out what documentation you’ll need (you always need documentation) and whether you qualify. Because if you’ve enjoyed mortgage debt forgiveness, there’s no reason to pay income tax on it.

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