Temporary relief for mortgage forgiveness

Under the Mortgage Forgiveness Debt Relief Act of 2007, homeowners can exclude up to $2 million in cancellation-of-debt (COD) income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). The exclusion is available for debts forgiven (via foreclosure or restructuring) through 2012.

QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn’t available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement (such as paying off credit cards).

If you exclude COD income under this provision and continue to own your home, you must reduce your tax basis in the home by the amount of the exclusion. This may increase your taxable gains when you sell the home.

Many well-meaning parents think they can avoid estate planning by simply jointly owning their property with their children. But this may not be such a good idea. For one thing, the value of the gift will be counted toward the parents’ lifetime gift/estate tax exemption. For another, the heir may owe capital gains tax if the property is sold. The transfer could even lead to a denial of Medicaid benefits down the road. This article explores the pitfalls.    

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For many debtors receiving financial help, the initial feeling of relief is quickly replaced by surprise and confusion when they discover they owe taxes on cancellation-of-debt (COD) income. This article explains what qualifies as COD income, and what debts qualify as exceptions or exclusions. A sidebar explains how some COD income can be excluded under the Mortgage Forgiveness Debt Relief Act of 2007.

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This issue’s “Tax Tips” explains that a gift tax return must be filed for all gifts that exceed the annual gift tax exclusion, even if no tax is owed. It looks at IRS intentions to discontinue the “high-low” method as an alternative for substantiating business travel expenses. And donors who wish to take advantage of charitable deductions should watch out for charities that lose their exemption.

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