Forgiveness of Indebtedness Income- 2014

Posted by kevin on December 19, 2014 under Foreclosure Blog | Comments are off for this article

If you owe money to a bank, say on a mortgage loan, and the bank accepts a short sale which nets them 200K but you owe 300K, then you have 100K of what is called “forgiveness of indebtedness” (FOI) income for which you may be required to pay taxes. Historically, the primary methods of getting around FOI income and the related taxes were to file bankruptcy or prove that you were insolvent at the time. In 2009, because of the mortgage meltdown, Congress eliminated FOI income on short sales, deeds in lieu of foreclosure, etc of primary residences- but not permanently.

That law ran out at the end of 2013. This left some of my clients who did short sales, etc in 2014 in financial limbo.

Well, the recent budget bill which passed in Congress last week extended the law which eliminates FOI taxes on primary residence for 2014. That is good news. In addition, taxpayers can deduct mortgage insurance premiums paid in 2014- private and public. Newspaper articles indicated that Congress was pushing for 2 years on these bills, but the Administration held out for 1 year.

There is a payback, sort of. When Ed DeMarco was head of the FHFA, he stedfastly refused to allow principal reductions on mortgages owed by or sold to investors through FNMA, Freddie Mac, FHA, VA. The media lamented that if only the president could get his guy, Mel Watt, into the position of head of the FHFA, then the government loans could be subject to principal reduction. Well, Watt is in, but there is still no principal reduction on the government loans. Moreover, the Mortgage News claims that since FOI income tax relief is being extended, Watt can use that trinket to avoid principal reduction. Let’s see how that plays out.