Mortgage Forgiveness Debt Relief Act, exception to cancellation of debt income


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Part 5
Welcome back to the Velocity of Money I am Michael J.

Barnes Arizona’s and I’m with Velocity Financial and we’re here every week talking about all matters financial regarding real estate as well as finances breath Allen is back on the air with us again along with Mike Patenella who is a certified public accountant for the last 20 years and amazing brain were glad he’s back on but before we go back to the folks I need just a few seconds here I need to give a shout out to the city of Glendale Police Department and fire departments , Tom and Karen Barnes had a devastating loss yesterday error house on fire I cannot believe how well the city of Glendale fire Department and Police Department handled the situation.

I would never wish a fire on anyone but I was going to happen I would make sure that I was a professional group of people like that thank you very much for taking care of our family are hearts go out to you Tom and Karen we wish you the best in a speedy recovery from your loss Mike we were talking before the break about loan modifications my point before going off the air was that people think they’re going to get this huge amount of money waived on a loan that they have realistically what most loan modifications are going to look like is extended term, significantly lower interest rate, generally a fixed interest rate for the entire time, and in some cases they will do some principal reduction and there is some exclusions for people having to pay tax on that is that correct? Yes there is before I get into that keep in mind that with taxes normally not one rule applies to everybody we are going to talk general but everyone’s going to have their own specific situation that they’re going to have to really check with somebody and make sure they’re doing the right thing.

In 2007 in response to the economic situation they passed a mortgage forgiveness debt relief act which essentially allows people to not pay tax on $2 million dollars debt forgiven on their principal residence That’s in regard to be principal reduction, loan modification Right so in your example it’s $50,000 of the loan being reduced if your situation fits, under this new law we might be able get you to avoid the tax on that Once again a very good reason for you to go to a professional CPA like yourself for that help not something the average person is going to be able to figure out on their own You have to keep up on the tax law and that’s almost a full-time job Hey how many pages is that tax code now? On last count I heard you say it was something like 9000 pages I don’t know the exact number of pages I know it’s in the several thousand and as Mike knows quite well I am aware of is also the tax code has the morphing and changing more than I have ever seen in my entire career here recently.

Going back to the tax act of 2003 to the present there have been literally been hundreds of changes.

So for the average person is listening to this broadcast who is considering a loan modification, trying to take care of a portfolio, and take care of their taxes at the same time WOW! Good luck to you So exclusions to the income, can we talk about a few different ones Sure bankruptcy is one exclusion if you’re filing bankruptcy; the other one is if the taxpayer is insolvent which essentially means that their liabilities exceed their assets.

When you factor in assets you factor in retirement accounts and all that it is not that easy to fall under that one Oh so the value of my 401(k) goes into that on the other side of the balance sheet.

Oh, Okay good to know So for the most part if you do not fall into one of these two you are going to try to rely on this new tax law to exclude some of the debt forgiven.

How long ago was that past? I am sorry I don’t remember was that August of 2007? It’s called the mortgage forgiveness debt relief act of 2007 and it only applies to qualified principal residences.

Is that an ongoing? Is there a cap on the time? Well originally it was set to expire at the end of 09.

Then in 2008, since the economy kept getting worse they extended that another three years or so through 2012 Well we hope we are all well through of this mess sooner and we won’t have to need this any longer after 2009.

Actually I want it gone now.
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