The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
  • Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

Source: http://www.irs.gov/individuals/article/0,,id=179414,00.html/

Mortgage Forgiveness Debt Relief Extended

On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. It allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before January 1, 2013.

New law – Taxable years 2009 through 2012

California law conforms, with modifications, to federal mortgage forgiveness debt relief for discharges that occurred in tax years 2007 through December 31, 2012. The amount of qualifying indebtedness is less than the federal amount and California imposes a state-only limitation on the total amount of relief excluded from gross income. The following summarizes the differences between the federal and California provisions. Federal provision applies to discharges occurring in 2007 through 2012, and:

  • Limits the amount of qualified principal residence indebtedness to $2,000,000 for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and to $1,000,000 for taxpayers who file as married filing separately.
  • Does not limit the debt relief amount; it only limits the indebtedness amount used to calculate the debt relief amount.
  • See the federal law Mortgage Forgiveness Debt Relief Act and Debt Cancellation for more information.

California provision applies to discharges that occurred in 2007 through 2012, and:

Taxable years 2009 through 2012

  • Limits the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/registered domestic partners (RDP) filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately.
  • Limits debt relief to $500,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $250,000 for taxpayers who file as married/RDP filing separately.

Taxable years 2007 and 2008

  • Limited the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/(RDP) filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately.
  • Limited debt relief to $250,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $125,000 for taxpayers who file as married/RDP filing separately.

Cancellation of Debt

Generally, if you have property that is used as security for a debt and that property is taken by the lender (foreclosed) in full or partial satisfaction of the debt, you are treated as having sold the property.1 This may generate either a gain or a loss, and in some cases cancellation of debt (COD) income. A mortgage restructuring (such as reduction in principal), that reduced your debt may also generate COD income.

In the wake of the 2007 American housing market collapse and subsequent mortgage crisis, the U.S. Congress enacted the Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110 142) and Emergency Economic Stabilization Act of 2008 (P.L. 110-343).

These Acts include provisions under federal law that, subject to certain conditions, that allows taxpayers to exclude from their federal taxable income the discharge of debt on their principal residence (COD income) that they would otherwise have been required to report (2007 through 2012).2 The special federal rules relating to qualified principal residence apply to debt reduced through mortgage restructuring, as well as to mortgage debt forgiven in connection with a foreclosure.

Property other than principal residence

The federal Mortgage Forgiveness Debt Relief Act only provides for the exclusion of COD income relating to qualified principal residence. If you have COD income as the result of a foreclosure on other property, such as a second (vacation) home, rental, or other business property, you may still be able to exclude COD income under other provisions if:

  1. You were bankrupt when the discharge occurred (Title 11 discharge).
  2. You were insolvent (limited to level of insolvency).
  3. Qualified farm indebtedness was canceled.
  4. Debt was Qualified Real Property Business Indebtedness (QRPBI)3 and you make a federal election.

If more than one of these exceptions applies, they are applied in the above order.4

For more information, see IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. The IRS Publication 4681 has a worksheet that can be used to help calculate the extent to which a taxpayer is insolvent immediately before the cancellation.

Information resources

Source: https://www.ftb.ca.gov/aboutftb/newsroom/mortgage_debt_relief_law.shtml

Manhattan Beach City Facts

Published in: on August 7, 2012 at 10:11 pm  Leave a Comment  

Power Plant Issues

POWER PLANT ISSUES

Recently, California law required that the existing AES Redondo Beach power plant be retired or replaced.  Unfortunately, AES has announced plans to re-build a new power plant.  According to AES, the building of the power plant will be a 9 year process-beginning in 2015 and ending in 2024.

Without resident action opposing the power plant, the Redondo Beach community will have economic, environmental, and health impacts for a plant that is not needed in the area.  The reality of the power plant is that it will only be supplying less than 1/1000th of the power to the California grid.  The plant will also be ranked in the top 100 polluters in the state.

CONTINUED BELOW

VS.

LATEST EVENTS

AES Presentation to the City of Redondo Beach
Tuesday, November 8
6:00 PM
Redondo Beach City Hall, Diamond Ave, Council Chambers
This evening AES will present their plans for new power plant to council. We welcome you to attend this important meeting to help support the no power plant effort. Join with your neighbors and send a clear message to our local government, and AES, that the community wants to retire the power plant for good. For more info., call (310) 374-4284

**Plans have been filed by AES to build a new power plant.

**Power plant is one of the top 100 polluters in the state.

**Power plant will only supply 1/10 of 1% power to the CA grid.

**Rebuilding the power plant will be a LOUD 9 years, from 2015-2024. 

This will likely affect your home value.                

For more info, go to:  nopowerplant.com

To sign the petition, go to:  ipetitions.com/petition/

Residents of the South Bay are encouraged to take action to stop the building of the power plant.  You can help by signing the petition, attending events, or donating to the cause.  For more information about the AES power plant, visit http://buildingabetterredondo.org/

Published in: on August 7, 2012 at 7:02 pm  Leave a Comment  

Hermosa Beach City Facts

AES POWER PLANT

Published in: on November 4, 2011 at 5:45 am  Leave a Comment  

Interview with Peter Tucker

Despite its mere 1.4 square miles, the City of Hermosa Beach prides itself on being at the forefront of growth, change, and thinking outside the box.  Its beach volleyball tournaments, bar and restaurant scene, summer concerts, street festivals, artwalks, Farmer’s Market, and renowned attractions such as the Lighthouse and Comedy & Magic Club have helped Hermosa earn its unofficial but undoubtedly deserved title of “Best Little Beach City.”  The City’s residents, proud of this distinction, are active in the community and passionate about anything that affects their surroundings, be it a political issue, an environmental one, one that impacts the local school system, etc.

I had the pleasure of speaking recently to former Mayor and current City Councilman Peter Tucker, who is running for re-election to City Council this November.  I asked him about some of the challenges and opportunities facing Hermosa today.  Here’s what he had to say:

Darren Pujalet:  Obviously the environment is a big issue at any level of government right now.  What is the current status of the AES Power Plant re-building issue and your thoughts on it?

Peter Tucker:  At the moment, we’re still trying to figure out what both Hermosa and Redondo want.  In 6 months, AES will petition to rebuild.  Hermosa residents have demonstrated an extraordinary commitment to improving our environment.  We all want to protect our children, our neighbors, and our beautiful beach.  I think this City needs to take a stand, and if we do so, other cities will follow.  The re-building of the plant and the subsequent air quality issue will affect everyone in Torrance, Redondo, and Hermosa.  The plant will remain there until 2018.  I am opposed to the re-building of the AES facility, and I will work to prevent it.

Darren Pujalet:  Can you update us on the McPherson Oil lawsuit?  How close is the City of Hermosa to resolving the matter?

Peter Tucker:  A decision will be made on October 31st regarding where to send the trial, and that will likely set the tone for what lies ahead.  McPherson has not reached out with a settlement amount.  The City met with them 6 times before the case finally went to an arbitrator.  We couldn’t get anywhere.  From their standpoint, we breached our contract, and they are entitled to a profit.  Our view is that we all thought we’d profit (in our case, namely the schools), until we realized the project was unsafe.  Our city has a right to prove that it’s an environmental and safety issue.  We are well-represented and well-prepared, and hopefully we can prevail.

Darren Pujalet:  I hear that a project similar to the Upper Pier Avenue Revitalization Project is under consideration for PCH and Aviation.  What would that entail?

Peter Tucker:  PCH and Aviation have looked exactly the same for 60 or 70 years.  We’ve got to make it more user-friendly and more appealing—with street lights, landscaping, etc.–  if we hope to attract the new business that will help increase revenues.  The challenge is paying for it.  Cal Trans, or the State, or environmental grants or a combination of all of these are likely the best options for covering the expense.

Darren Pujalet:  Are there any other City issues that are of particular importance to you or to City residents?

Peter Tucker:  Well, securing the future of our schools is always extremely important to Hermosa Beach residents.  We also need to maintain the quality of our police, fire, and city services and maintain our infrastructure while staying within a budget that protects our economic future.  As a dog owner, I’d really love to determine the feasibility of a Hermosa Beach Dog Park, and I’m an avid supporter of keeping all forms of the arts alive in our community—live music, theater, and visual art have always been a part of Hermosa lifestyle, and I’d like to see that continue.

 

 

Published in: on November 1, 2011 at 7:31 pm  Leave a Comment  

HERMOSA BEACH ISSUES

HERMOSA BEACH ISSUES-POWER PLANT 

Recently, California law required that the existing AES Redondo Beach power plant be retired or replaced.  Unfortunately, AES has announced plans to re-build a new power plant.  According to AES, the building of the power plant will be a 9 year process-beginning in 2015 and ending in 2024.

 Without resident action opposing the power plant, the Redondo Beach community will have economic, environmental, and health impacts for a plant that is not needed in the area.  The reality of the power plant is that it will only be supplying less than 1/1000th of the power to the California grid.  The plant will also be ranked in the top 100 polluters in the state.

CONTINUED BELOW

VS.

LATEST EVENTS

AES Presentation to the City of Redondo Beach
Tuesday, November 8
6:00 PM
Redondo Beach City Hall, Diamond Ave, Council Chambers
This evening AES will present their plans for new power plant to council. We welcome you to attend this important meeting to help support the no power plant effort. Join with your neighbors and send a clear message to our local government, and AES, that the community wants to retire the power plant for good. For more info., call (310) 374-4284

**Plans have been filed by AES to build a new power plant.

**Power plant is one of the top 100 polluters in the state.

**Power plant will only supply 1/10 of 1% power to the CA grid.

**Rebuilding the power plant will be a LOUD 9 years, from 2015-2024. 

This will likely affect your home value.                

For more info, go to:  nopowerplant.com

To sign the petition, go to:  ipetitions.com/petition/

 Residents of the South Bay are encouraged to take action to stop the building of the power plant.  You can help by signing the petition, attending events, or donating to the cause.  For more information about the AES power plant, visit http://buildingabetterredondo.org/

Published in: on October 20, 2011 at 1:28 am  Leave a Comment  

South Bay Lifestyle – Farmers Markets

Buying local and organic has never been so easy in the South Bay as it is today. Nearly every day of the week, there is a Farmer’s Market in one of the beach cities, offering fresh, locally grown fruits, veggies, nuts, flowers, fish, jams, honey, salsa and spreads, kettle corn, prepared food, and more.

Tuesdays, 11am-4pm, 13th Street at Morningside Drive

Wednesdays, 8am-2pm, El Segundo Plaza parking lot

Thursdays, 8am-1pm, Veterans Park, Esplanade & Torrance Blvd.

Fridays, 11am-4pm, Valley Drive, between 8th and 10th Streets

Capital Gains Tax Increase – Should You Sell This Year?

 

Courtesy of American.com

It is likely that the Federal long-term capital gains tax rate is going to increase from 15 to 20 percent in 2011. If you are planning to sell your home over the next couple of years, this pending increase is a critical point to consider.

It may benefit some homeowners to sell this year, before the increase. At first glance, in fact, it seems like a no-brainer for every seller to act fast and pay lower taxes this year. However, it is important not to overlook the force of compounding when making a decision. By hanging on to the money that would be going to the government to pay taxes, you can invest it and benefit from its growth. If the benefit from the future gains is greater than the tax savings from this year’s lower rate, you may be better off holding on to the security.

There are two main factors you need to take into account in deciding whether to sell or maintain your investment: your expected annual return and the number of years you are able and willing to hold on to the investment if you don’t sell this year.

If you expect healthy returns and you are in a position to be a long-term investor, it may benefit you to hang on to some of those gains.

Taxes and home sales are never black and white, so here are a few thoughts to consider before making your decision:

1. Have I consulted with a knowledgeable real estate agent who is familiar with comparable home prices in my neighborhood to determine realistic pricing for my home?

2. Have I consulted with my financial advisor to determine how many years I may need to stay in my home if I choose not to sell this year?

3. Is my home ready for sale? Are any home improvements or renovations needed to raise the value of my home?

4. What is my motivation to sell? If I choose to sell this year, am I willing to set a realistic price for my home so that it sells in time to benefit from the lower tax rate?

5. If I choose to wait, how long am I realistically willing to hold on to this property?

Overall, selling your gains this year is not the easy solution that many people seem to think. However, educating yourself on the pros and cons of moving with the help of a good agent and financial advisor will certainly help you to make an informed decision.

Curious what your home is worth? Call for a free market analysis: 310-613-1690

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