So, if you receive a 1099-C (Cancellation of Debt) form from your mortgage lender and the QPRI exclusion applies, you don't have to report the forgiven principal as income on your federal tax return, which is good news.
This extension is also good news for homeowners thinking about completing a loan modification, short sale, or deed in lieu of foreclosure through 2025 because debt that's forgiven as part of the transaction might not be subject to taxation.
If a mortgage lender forgives all or part of a borrower’s debt as part of a loan modification or after a foreclosure, short sale, or deed in lieu of foreclosure, the IRS generally includes the amount in the borrower’s gross income. So, the forgiven debt could result in tax liability.
But if your forgiven mortgage debt qualifies for this exclusion, as of December 31, 2020, you can exclude up to $750,000 ($375,000 if married and filing separately). Before this date, taxpayers could exclude $2 million ($1 million if you're married and filing separately).
The QPRI exclusion was first introduced in the Mortgage Forgiveness Debt Relief Act of 2007, and I.R.C. § 108(a)(1)(E) was added to the Internal Revenue Code. The exclusion was set to expire on January 1, 2021. But it was extended to January 1, 2026.
The exclusion also applies to debts forgiven as the result of a written agreement entered into before January 1, 2026, even if the actual discharge happens later.
To learn more about this tax break and the conditions to qualify, review IRS. Publication 4681 on Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Tax laws are complicated, and even if you don't qualify for the QPRI exclusion, another exception or exclusion could save you from having to pay taxes on canceled debt. Also, forgiven debt might affect your state taxes.
If you received a 1099-C form indicating your lender forgave all or part of your mortgage debt, or if you’re considering completing a loan modification, short sale, or deed in lieu of foreclosure that has tax implications, consider talking to a tax attorney or tax accountant to get advice specific to your circumstances.
]]>To keep financially strapped homeowners from taking a hit at tax time, Congress passed the Mortgage Forgiveness Debt Relief Act in 2007, and I.R.C. § 108(a)(1)(E) was added to the Internal Revenue Code. This law created the "Qualified Principal Residence Indebtedness" (QPRI) exclusion.
Under this exclusion, if part or all of your mortgage debt on your principal residence is forgiven, you might be able to exclude the forgiven debt from your taxable income.
Ordinarily, when $600 or more of debt is forgiven or canceled by a creditor, the amount forgiven is considered income for federal tax purposes. When it's clear you won't be repaying the money you received, tax law recognizes the money as income.
For example, say you do a short sale, selling your home for $550,000. But you owe the lender $600,000. As part of the short sale agreement, your lender agrees not to pursue you for the deficiency and issues you an IRS Form 1099-C, Cancellation of Debt, form.
The waived amount might be considered income for tax purposes.
The amount of the forgiven debt is considered income only once it's canceled. So, you must report the forgiven amount on your federal (and perhaps state) tax return and pay taxes on it, just like any other kind of income, unless you qualify for an exception or exclusion.
If your lender has forgiven some or all of your mortgage debt, can you get out of paying income tax on that debt using the QPRI exclusion? Here are the key factors that determine if you qualify for the QPRI exclusion.
The QPRI exclusion expires on January 1, 2026. But the exclusion can also apply to debts forgiven as the result of a written agreement entered into before January 1, 2026, even if the actual discharge happens later. (I.R.C. § 108(a)(1)(E)).
If you don't qualify for tax relief under the QPRI exclusion, you might qualify for another exception or exclusion.
Cancellation of debt income generally isn't taxable if the debt has been discharged in bankruptcy (before it's forgiven), you're insolvent when the debt is forgiven, the debt is a certain kind of farm debt, or if the property was subject to a nonrecourse debt. (A "recourse debt" is a loan the borrower is personally liable to repay.)
The IRS has more information about forgiven mortgage debt and instructions for taxpayers at www.irs.gov. Review IRS Publication 4681 on Canceled Debts, Foreclosures, Repossessions, and Abandonments, as well as Topic No. 431 Canceled Debt – Is It Taxable or Not?
Learn more about tax consequences when a creditor writes off a debt.
Get information about strategies for negotiating with creditors to settle debts.
Find out which is worse for your credit scores—a foreclosure, short sale, or loan modification.
Tax laws are complicated. If you received a 1099-C form indicating your lender forgave all or part of your mortgage debt, or if you’re considering completing a loan modification, short sale, or deed in lieu of foreclosure that has tax implications, talk to a tax attorney or tax accountant to get advice specific to your circumstances.
If you have questions about how foreclosure works, need help applying for a loan modification, or want to learn the pros and cons of completing a short sale or deed in lieu of foreclosure, talk to a foreclosure lawyer.
A HUD-approved housing counselor can also provide you with loss mitigation information.
]]>But if you let the tax sale go through, you'll most likely lose ownership of your property. So, if you want to keep your Oklahoma home, you must take steps to deal with the unpaid taxes before the sale is finalized.
People who own real property have to pay property taxes. The government uses the money that these taxes generate to pay for schools, public services, libraries, roads, parks, and the like. Typically, the tax amount is based on a property's assessed value.
If you have a mortgage on your home, the loan servicer might collect money from you as part of the monthly mortgage payment to later pay the property taxes. The servicer pays the taxes on the homeowner's behalf through an escrow account.
But if the taxes aren't collected and paid through this kind of account, the homeowner must pay them directly.
In Oklahoma, under normal circumstances, if you don’t pay your property taxes for three or more years, the county treasurer can sell your home to satisfy the unpaid debt. (Okla. Stat. Ann. tit. 68 § 3105, § 3125).
The county treasurer will send you (the record owner of the property) a notice by certified mail at least 30 days before the sale. The county treasurer must also publish notice of the sale in a newspaper once a week for four weeks. If the county doesn’t have a newspaper or if it refuses to publish the notice, the information must be posted at the courthouse. (Okla. Stat. Ann. tit. 68 § 3127).
The tax sale consists of a public auction where the county treasurer sells the home to the highest bidder. The winning bid must be at least equal to the lesser of:
If no one bids the minimum amount, the treasurer bids off the property in the name of the county, and the county gets the home. (Okla. Stat. Ann. tit. 68 § 3129, § 3131). After the sale, the high bidder or the county gets a deed (title) to the home. (Okla. Stat. Ann. tit. 68 § 3131).
In many states, the homeowner can redeem the home after a tax sale by paying the buyer from the tax sale the amount paid (or by paying the taxes owed), plus interest, within a limited amount of time. Exactly how long the redemption period lasts varies from state to state, but usually, the homeowner gets at least a year from the sale to redeem the property.
In other states, the redemption period happens before the sale.
In Oklahoma, a redemption must happen before the county treasurer executes the deed to the new owner. (Okla. Stat. Ann. tit. 68 § 3113). So, most homeowners in Oklahoma don’t get the right to redeem once the new owner gets a deed to the property.
To redeem the home, you must pay all accumulated taxes, interest, and costs (Okla. Stat. Ann. tit. 68 § 3113).
Only under very limited circumstances will you get some additional time to redeem: Minors and incapacitated (or partially incapacitated) persons may redeem within one year after the expiration of such disability. (Okla. Stat. Ann. tit. 68 § 3113).
The amount required to redeem is the delinquent taxes plus interest and penalty (though not more than 10% per year) (Okla. Stat. Ann. tit. 68 § 3113).
Some homeowners in Oklahoma can get an exemption from a tax sale. This means your home cannot be sold at a tax sale even if you’re behind in paying your property taxes.
Who qualifies for a tax sale exemption. The county treasurer won't conduct a tax sale if:
How to get a tax sale exemption. You must submit an application (along with supporting evidence) to the county treasurer before your property is sold at a tax sale (Okla. Stat. Ann. tit. 68 § 3105).
Because a property tax lien has priority, mortgages (and deeds of trust) get wiped out if you lose your home through a tax sale process. So, If your loan isn't escrowed and you fail to pay the property taxes like you're supposed to, the loan servicer will usually advance money to pay delinquent property taxes to prevent a tax sale from happening.
Most mortgages have a clause allowing the lender to add the amount it paid to bring the taxes current to your loan balance. You'll then have to make repayment arrangements with the servicer or potentially face a foreclosure.
If you’re already facing a property tax sale in Oklahoma and have questions (or need help redeeming your property), consider talking to a foreclosure, tax, or real estate lawyer.
]]>The three basic types of reverse mortgages are:
When you take out a reverse mortgage, the title to your home remains with you, and you continue to live in the home. You must continue to pay for repairs, property insurance, and taxes. When you move out, sell the home, or die (or the last surviving borrower dies), you or your estate must repay the loan.
The loan balance will include the amount paid to you in cash, plus the interest and fees added to the loan balance each month. So, your total debt increases as the loan funds are paid to you and interest on the loan accrues.
Usually, when the loan become due, you or your heirs will have to sell the home and use the proceeds to pay it off. You or your heirs can keep any money left over. If you or your heirs want to retain ownership of the home, you usually must repay the loan in full—even if the loan balance is greater than the home's value.
As far as taxes go, reverse mortgages have pros and cons.
On the plus side, reverse mortgages are considered loan advances to you, not income you earned. So, the payments you receive aren't taxable. Moreover, they usually don’t affect your Social Security or Medicare benefits.
On the downside, all the interest that accrues on your reverse mortgage is not deductible by you until you actually pay it, which is usually when you pay off the loan in full. Moreover, your mortgage interest deduction is usually subject to the same limits as other home equity loans—that is, you can deduct the interest on no more than a loan of $100,000.
A reverse mortgage might or might not be your best option. Here are some factors to keep in mind:
Do your homework before taking out a reverse mortgage. For more information about reverse mortgages, visit the website of the Consumer Financial Protection Bureau (search for "reverse mortgage") and AARP's useful articles on reverse mortgages.
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