New Foreclosure Relief Laws
Foreclosure Relief 2007-2008
1) Mortgage Foregiveness Debt Relief Act of 2007
Prior to this new law, when a lender foreclosed on a property and sold the property for less then the unpaid balance of the mortgage, the tax code would treat the difference as ordinary income on a tax return.
The new provision, excludes from taxation discharges of up to $2M in indebtedness that is secured by a principal residence and is incurred in the acquisition, construction or substantial improvement of the principal residence
a) Example- Principal residence is subject to $750,000.00 mortgage debt. Foreclosure commences and the property is sold for only $500,000.00. Before the new law, $250,000.00 would be taxable as ordinary income. Under the new law this would be exempt from taxation.
b) Effective dates- this law is retroactive to January 1, 2007 and it ends on December 31, 2009.
c) Basis reduction- the excluded income of $250,000.00 reduces the cost basis of the property and this effectively eliminates the gain if it is under $250,000.00 or converts the gain to capital gain, if it is over $250,000.00 [$500,000.00 for married filing joint taxpayers with joint home ownership].
d) Mortgage workouts- are included within this new law. For example, the workout plan organized by the President and a group of lenders would forego adjustable rate resets for up to 5 years. This and other mortgage workouts would be taxable income if not for this new law.
e) Home Equity Loans- are not included within this new law unless the proceeds were used for home renovations.
f) Principal Residence- is the same as defined under the tax code.
g) Mortgage Insurance- under the new law, premiums paid or accrued are deductible.
2) Adjustable Rate Resets
President Bush and a group of lenders proposed a workout plan in which these lenders would forego adjustable rate resets for up to 5 years. This applies to Subprime loans that meet certain tests.
3) “Project Lifeline”
The Bush administration announced a new initial today, February 12, 2008, aimed at helping homeowners.
This program would put the foreclosure process on hold for 30 days and includes 6 of the nation’s largest lenders, which service almost 50% of the nation’s mortgages.
Project Lifeline is available to people who have taken out all types of mortgages, not just subprime mortgages which were the focus of previous relief efforts.
The lenders promise to contact homeowners who are 90 days or more in default on the monthly mortgage payments and these homeowners will be provided with the opportunity to have the foreclosure process paused for 30 days while the lenders attempt to make the mortgage more affordable for the homeowner.