One of the unfortunate side effects of the recession is that many people have suffered a foreclosure. I have had clients asking me about the tax consequences of a foreclosure, and worrying about how that will affect their taxes.
The good news for homeowners is that they do not have to pay tax on any debt that is forgiven as part of a foreclosure on a principal residence. This applies to foreclosures happening in 2007-2012.
Note that this only applies to foreclosures on principal residences, and only to mortgage amounts that were used to buy or make improvements to the home. If you refinanced your mortgage and used some of the proceeds for other purposes, such as paying bills, and then suffer a foreclosure, you might have taxable income to report.
Also, forgiveness of other types of debt, such as credit card debt, is always treated as taxable income to you (unless you are insolvent or in bankruptcy).
While you may not be taxed on the debt forgiven in a home foreclosure, you do still have to report the amount of forgiven debt by attaching Form 982 to your tax return.
And even if the forgiven debt is not taxable, you may still have to report a capital gain on the mortgage forgiveness. The amount of gain or loss will depend on whether or not you were personally liable for the mortgage, the amount of debt forgiven, the fair market value of the house, and your basis in the house. If you suffer a capital loss on a foreclosure, the loss is not deductible.
As you can see, at its most basic level, a home foreclosure is simple – you aren’t taxed on any debt forgiven. But your reporting requirements can be complex. If you are going through a foreclosure, you should seek out a professional tax preparer such as myself to help you with your tax and reporting obligations.
Tuesday, April 27, 2010
Friday, April 23, 2010
Homebuyer Credits and Married Couples
Yesterday I talked about how the Homebuyer Tax Credits work for unmarried people who purchase a home together. Today, I will discuss how the credits work for married couples. As mentioned yesterday, the rules are generally more generous to unmarried people who buy a home together than to married couples who buy a home.
The biggest hurdle that a married couple faces with the Homebuyer Credits is that both spouses must qualify for the same credit in order for the couple to receive the credit. If one spouse qualifies for the first-time homebuyer credit and one spouse qualfies for the long-time homeowner credit, then neither credit is available to the couple.
The qualifications for the first-time homebuyer credit are more straightforward, so I'll start with that. This credit is available to anyone who has not owned a home in the last three years. For a married couple, both spouses would have to have not owned a home in the last three years in order for the couple to qualify.
The qualifications for the long-time homeowner credit are that you must have owned and lived in teh same home for at least five years out of the last eight years. Note the emphasis on "same home." For a married couple to qualify for this credit, both spouses must have had an ownership interest in, and lived in, the same home.
EXAMPLE: "A" and "B" were married in 2009 and they buy a home together in 2010. Prior to buying the new home in 2010, they lived in the house "A" owned. "A" had owned and lived in this house for six years; "B" had never owned a home before. Even though "A" meets the requirements for the long-time homeowner credit and "B" meets the requirements for the first-time homebuyer credit, they cannot claim either credit, because they don't both meet the requirements for either credit.
Confusing? If you think you might qualify for the credit or if you have any questions, you should seek the counsel of a qualified tax professional such as myself.
This article does not constitute tax advice. Because each person's situation is unique, you should consult with a tax advisor before making any decisions.
The biggest hurdle that a married couple faces with the Homebuyer Credits is that both spouses must qualify for the same credit in order for the couple to receive the credit. If one spouse qualifies for the first-time homebuyer credit and one spouse qualfies for the long-time homeowner credit, then neither credit is available to the couple.
The qualifications for the first-time homebuyer credit are more straightforward, so I'll start with that. This credit is available to anyone who has not owned a home in the last three years. For a married couple, both spouses would have to have not owned a home in the last three years in order for the couple to qualify.
The qualifications for the long-time homeowner credit are that you must have owned and lived in teh same home for at least five years out of the last eight years. Note the emphasis on "same home." For a married couple to qualify for this credit, both spouses must have had an ownership interest in, and lived in, the same home.
EXAMPLE: "A" and "B" were married in 2009 and they buy a home together in 2010. Prior to buying the new home in 2010, they lived in the house "A" owned. "A" had owned and lived in this house for six years; "B" had never owned a home before. Even though "A" meets the requirements for the long-time homeowner credit and "B" meets the requirements for the first-time homebuyer credit, they cannot claim either credit, because they don't both meet the requirements for either credit.
Confusing? If you think you might qualify for the credit or if you have any questions, you should seek the counsel of a qualified tax professional such as myself.
This article does not constitute tax advice. Because each person's situation is unique, you should consult with a tax advisor before making any decisions.
Thursday, April 22, 2010
Homebuyer Tax Credits and Unmarried Couples
Unmarried couples in Iowa, and people who are considered unmarried by the federal government (i.e., same-sex couples married under Iowa law) may be able to take advantage of the homebuyer tax credits in ways that married couples cannot. As most of us know, there are two credits available, one for first-time homebuyers and one for long-time homeowners who buy a new house. First-time homebuyers can receive a credit of up to $8,000 for the purchase of a new home, while long-time homeowners can receive a credit of up to $6,500.*
A first-time homebuyer is defined as someone who has not owned a home in the three-year period that ends on the date the new home is purchased. A long-time homeowner is defined as someone who has owned and lived in the same home for at least five consecutive years out of the eight years ending on the date the new home is purchased.
The issue gets complicated when two people buy a home together, and one person qualifies for the first-time homebuyer credit and the other person qualifies for the long-time homeowner credit. For married couples, if one spouse qualifies for one credit and the other spouse qualifies for the other credit, then neither credit is available to the couple. However, this is not the case when the two people are unmarried – or are considered unmarried by the federal government.
Here’s an example, to help make this a little clearer:
Taxpayer A and Taxpayer B, husband and wife, buy a house together. “A” qualifies as a first-time homebuyer; “B” qualifies as a long-time homeowner. Because they are married, they are unable to claim either credit.
Now let’s say “A” and “B” are unmarried. Because “A” qualifies as a first-time homebuyer, the $8,000 credit is available. Additionally, “A” and “B” can split that credit any way they want. The only catch is, “B” cannot receive more than $6,500 (the maximum amount a long-time homeowner can get). So “A” could claim the entire $8,000, or “A” could claim $1,500 and “B” could claim $6,500, or any other reasonable allocation, as long as the total amount allocated doesn’t exceed $8,000 and “B” doesn’t receive more than $6,500.
What is not allowed is for “A” to claim $8,000 as a first-time homebuyer and “B” to claim $6,500 as a long-time homeowner on the same property. The credit is limited to $8,000 total for the property.
As you can see, this can be a complicated issue that is best worked through with the help of a qualified tax advisor. And remember, to qualify for the credit, the purchase contract on the home must be signed by April 30th, and you must close on the home by June 30th.
*-The credit is limited to the lesser of 10% of the purchase price of the home, or $8,000/$6,500.
This article does not constitute tax advice. Because each person’s tax situation is unique, it is recommended that you contact a qualified tax professional for further assistance.
A first-time homebuyer is defined as someone who has not owned a home in the three-year period that ends on the date the new home is purchased. A long-time homeowner is defined as someone who has owned and lived in the same home for at least five consecutive years out of the eight years ending on the date the new home is purchased.
The issue gets complicated when two people buy a home together, and one person qualifies for the first-time homebuyer credit and the other person qualifies for the long-time homeowner credit. For married couples, if one spouse qualifies for one credit and the other spouse qualifies for the other credit, then neither credit is available to the couple. However, this is not the case when the two people are unmarried – or are considered unmarried by the federal government.
Here’s an example, to help make this a little clearer:
Taxpayer A and Taxpayer B, husband and wife, buy a house together. “A” qualifies as a first-time homebuyer; “B” qualifies as a long-time homeowner. Because they are married, they are unable to claim either credit.
Now let’s say “A” and “B” are unmarried. Because “A” qualifies as a first-time homebuyer, the $8,000 credit is available. Additionally, “A” and “B” can split that credit any way they want. The only catch is, “B” cannot receive more than $6,500 (the maximum amount a long-time homeowner can get). So “A” could claim the entire $8,000, or “A” could claim $1,500 and “B” could claim $6,500, or any other reasonable allocation, as long as the total amount allocated doesn’t exceed $8,000 and “B” doesn’t receive more than $6,500.
What is not allowed is for “A” to claim $8,000 as a first-time homebuyer and “B” to claim $6,500 as a long-time homeowner on the same property. The credit is limited to $8,000 total for the property.
As you can see, this can be a complicated issue that is best worked through with the help of a qualified tax advisor. And remember, to qualify for the credit, the purchase contract on the home must be signed by April 30th, and you must close on the home by June 30th.
*-The credit is limited to the lesser of 10% of the purchase price of the home, or $8,000/$6,500.
This article does not constitute tax advice. Because each person’s tax situation is unique, it is recommended that you contact a qualified tax professional for further assistance.
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