Selling the Family Home

Selling house in divorce

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THE FAMILY HOME, typically, is one of the most significant assets shared by parties seeking a divorce. These days, though, the family home seems to be one of the most significant liabilities, as so many properties have lost their value in a declining real estate market.For many families, the situation just got worse. The Mortgage Forgiveness Debt Relief Act and Debt Cancellation expired December 31, 2013, and though it has been extended twice before by Congress, it is unlikely to be revived this time.

The purpose of The Mortgage Forgiveness Debt Relief Act of 2007 was to help homeowners through the mortgage foreclosure crisis by providing income tax relief. According to the IRS, if a taxpayer borrows money from a lender and the lender later forgives the debt (known as “cancellation of debt”), the taxpayer then is required to report the amount forgiven as “income” on his or her tax return and is required to pay taxes on that income.

For example, if you borrowed $200,000 from a lender with the intention of paying the lender back, at the time you borrowed the money, the IRS would not consider that money to be “income,” for tax purposes because you have the intention of paying it back. However, if you only pay $110,000 and the lender “forgives” or “cancels” the remaining $90,000, then the IRS considers the forgiven amount–$90,000–to be “income.” That income must be reported on your tax return, and you are required to pay taxes on it.

Under The Mortgage Forgiveness Debt Relief Act of 2007, homeowners were allowed to exclude their primary residences from Cancelled Debt. In other words, if from 2007 through 2013, you modified your mortgage, sold your home for less than you owed on your mortgage (a short sale), or your home was foreclosed by the lender, you were not required to show that “forgiven” or “cancelled” debt as income on your tax return.

Going forward, if you must short sell the family home, modify the loan, or if the home is in foreclosure, and the lender cancels any of the debt, at the end of the year, that cancelled debt must be reported on your income tax return as income, and you will be required to pay taxes on it. This means you could wind up with a significant income tax bill at the end of the year. It is critical for both parties to be aware of this information, the long term ramifications of the decision, and each person’s obligations.

Before making any decisions on whether or not to sell your family home, modify the loan or allow the property to go into foreclosure, you should consult with an attorney who can guide you and help protect your interests. Call Ambrose Family Law today toschedule a consultation to discuss your particular situation and consider all your options.

To learn more about The Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS website.


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