Effects of the sub-prime mortgage debacle are certain to be felt in divorce proceedings. Moreover, relief granted by Congress to distressed homeowners will present additional tax issues of which divorce lawyers should be aware.
The Mortgage Forgiveness Debt Relief Act of 2007 (Act) provides tax relief to defaulting homeowners who might otherwise owe income tax on the forgiven portion of their mortgage obligation. A lender that is paid less than the full principal owed on the mortgage often decides not to personally pursue the borrower for the deficiency. In that case the lender files Form 1099-C informing IRS and the borrower of the forgiven portion of the debt that is to be treated as income.
The Act makes nontaxable debt forgiven on a qualified principal residence (QPR) with certain limitations as follows:
1. The relief applies to debt forgiven between January 1, 2007 and December 31, 2009.
2. Qualified principal residence is a residence as to each taxpayer meeting the same definition as under Section 121 relating to the home sale exclusion of $250,000 ($500,000 for joint returns).
3. The debt must be secured by a QPR and be either:
a. Acquisition indebtedness up to $2,000,000 ($1,000,000 on a MFS return, or,
b. Home equity indebtedness up to $100,000 ($50,000 on MFS return) to the extent that when added to other QPR debt the total debt does not exceed the FMV of the residence.
4. The amount excluded from income reduces the tax basis of the property immediately.