By MARCIE GEFFNER
Homeowners found three attractive tax breaks among their holiday presents, thanks to the federal Mortgage Forgiveness Debt Relief Act of 2007, which was enacted in December.
The first tax break concerns forgiveness of debt, which association.
The third tax break occurs when a lender forgoes repayment of principal and/or interest the borrower owes.
Typically, discharged debt is considered ordinary income to the borrower for income tax purposes. The law allows taxpayers to exclude this amount and thus escape the tax liability.
Lenders are required to report forgiveness of debt to the Internal Revenue Service, which means taxpayers likely will need to note the amount and the reason for the exclusion on their tax returns. Consult a qualified tax professional for more information and advice about your situation.
Under the rules for debt forgiveness:
- The debt must have been discharged by the lender in 2007, 2008 or 2009
- The amount of debt that can be excluded is limited to $2 million
- The exclusion can be used only if the loan was taken out to acquire, build or substantially improve a principal residence
- Debt forgiven on a cash-out refinance or home equity loan must be apportioned between the amounts used for home acquisition, construction or improvement and amounts used for other purposes. Only the allowable portion qualifies for the tax break.
The second tax break concerns mortgage insurance, which is paid for by the borrower, but protects the lender if the borrower defaults.
The new law extends a one-year deduction of mortgage insurance premiums that was effective in 2007 for three more years, 2008, 2009 and 2010. That time frame means the deduction is allowable only for mortgage insurance on loans that were originated after Dec. 31, 2006, and before Jan. 1, 2011, unless the tax break is further extended in the future.
The full deduction is available only to taxpayers whose adjusted gross income is less than $100,000. A partial deduction is allowed for adjusted gross incomes up to $109,000. The deduction is worth $350 for the average taxpayer, according to Mortgage Insurance Companies of America, an industry concerns capital gains tax on the sale of a principal residence when a person's spouse dies. Federal law allows singles and married couples to exclude $250,000 and $500,000, respectively, of the gain on the sale of their home from capital gains tax if certain tests are met. The differential treatment on the basis of marital status meant that a person whose spouse died had to sell his or her home in the same tax year as the spouse's death to take advantage of the larger tax break.
The new law allows a surviving spouse to claim the $500,000 if the home is sold within two years after the date of the spouse's death, which eliminates the tax liability on an additional $250,000 of capital gain if the other tests are met as well.
