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My understanding is, the Debt Forgiveness Act of 2007 ends at the end of this year, 2012.
If you refinanced and made home improvements for the home, then its not taxable, however if you got cash out for cars and boats, it is taxable.
So if the refi was, lets say 5 years ago and the mortgage note was passed around from lender to lender, how would the bank know what you used the funds for? Does that matter to them now?
Is this an issue with the IRS or with the current mortgage holder?
or are you telling the bank upfront what it was used for?
My understanding is, the Debt Forgiveness Act of 2007 ends at the end of this year, 2012.
If you refinanced and made home improvements for the home, then its not taxable, however if you got cash out for cars and boats, it is taxable.
So if the refi was, lets say 5 years ago and the mortgage note was passed around from lender to lender, how would the bank know what you used the funds for? Does that matter to them now?
Is this an issue with the IRS or with the current mortgage holder?
or are you telling the bank upfront what it was used for?
People lie. The chances of an IRS audit are slim to none on the Mortgage and Debt Forgiveness ACT (as long as they using it for their only home).
Let's just say if someone took out a $100K home equity loan. Unless the IRS audits them and make them (the delinquent homeowner) account for every penny; The IRS doesn't have the manpower to go after every little guy.
The way the IRS audits people never makes sense. They are more likely to go after higher earners.
My understanding is, the Debt Forgiveness Act of 2007 ends at the end of this year, 2012.
If you refinanced and made home improvements for the home, then its not taxable, however if you got cash out for cars and boats, it is taxable.
So if the refi was, lets say 5 years ago and the mortgage note was passed around from lender to lender, how would the bank know what you used the funds for? Does that matter to them now?
Is this an issue with the IRS or with the current mortgage holder?
or are you telling the bank upfront what it was used for?
Forest -
I like your honesty - but it is driving you crazy.
I don't understand the question? A 1099C is what you received after a cancellation of debt.
You mentioning refinancing and taking cash out. This doesn't have anything to do with debt cancellation? If you used the cash to settle at a lower amount like on credit card. Then the credit card company would send you a 1099C, not the mortgage company.
On mortgages when there is a short sale, of a foreclosure. Mortgage company's issue a 1099C for what the balance was vs the difference to what the property is sold. That is want the Debt Forgiveness Act was for. If this was your primary property, you don't have to worry about it. Again if it is your mortgage concerning a 1099C, I have personally seen examples when back inflate the numbers, to reclaim as much is possible.
It is nobody's business but yours what you spent the money on. Even if it was, Mortgage company's do not have the resources to check this.
If you received one, all you have to do is include it with your W2's when you have your taxes done. If you don't include it, then IRS can garnish your return. It's not rocket science, it's hit or miss.
You know as well as I know that the mortgage and forgivness act EXCLUDES cash out refinancing and home equity loans to fund lifestyle choices (cars vacations pay off other non home debts like credit card).
The law asks the people receiving the 1099c who did the above to count that as income and be taxed. Like my buddy who took out 150k heloc to pay off other debt and short sold his home.
Like you said. The chances of an IRS audit is small. Essentially by you saying its nine of the banks business what they did with the money. But the IRS law does care what people did with the money.
"Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately" The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
That above QA seems pretty clear cut the IRS want to know what you did with your money.
They depend on the taxpayers honestly. Again I believe the vast majority of taxpayers who took out home equity loans or cash out refinance and got 1099c will lie and use this law to their advantage. They will take their chances on the rare event of an IRS audit.
You know as well as I know that the mortgage and forgivness act EXCLUDES cash out refinancing and home equity loans to fund lifestyle choices (cars vacations pay off other non home debts like credit card).
The law asks the people receiving the 1099c who did the above to count that as income and be taxed. Like my buddy who took out 150k heloc to pay off other debt and short sold his home.
Like you said. The chances of an IRS audit is small. Essentially by you saying its nine of the banks business what they did with the money. But the IRS law does care what people did with the money.
"Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately" The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
That above QA seems pretty clear cut the IRS want to know what you did with your money.
They depend on the taxpayers honestly. Again I believe the vast majority of taxpayers who took out home equity loans or cash out refinance and got 1099c will lie and use this law to their advantage. They will take their chances on the rare event of an IRS audit.
Good clarification aneftp
OP mentions first a 1099C - refinancing to make home improvements or cash out for cars and boat. I don't see where the cancellation of debt is?
If the refi included cash out to pay off debt like credit cards, then received a 1099C from the credit card companies. Even though he received a cancellation of debt notice from them, there is nothing trying this to money he took out through his refinancing.
If refi was 5 years ago and the investor changed a few times. I think he's worried because he pulled cash it to pay bills. That the mortgage company could come after him???? 95% of the refinances I originated the 7yrs worked as an LO, most refinances included cash out for paying off other debts. This Is not an issue with the IRS or with the current mortgage holder? "forestgump" doesn't have to worry about it.
Answering his question when Debt Forgiveness Act of 2007 ends, is at the end of this year 2012. The Mortgage Debt Relief Act allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a short sale or foreclosure,
My understanding is, the Debt Forgiveness Act of 2007 ends at the end of this year, 2012.
If you refinanced and made home improvements for the home, then its not taxable, however if you got cash out for cars and boats, it is taxable.
So if the refi was, lets say 5 years ago and the mortgage note was passed around from lender to lender, how would the bank know what you used the funds for? Does that matter to them now?
Is this an issue with the IRS or with the current mortgage holder?
or are you telling the bank upfront what it was used for?
You have to provide the information to your mortgage company at the time you apply for help or a modification. It is part of the financial disclosure.
Well, this whole thread is just what I thought it would be. Nobody has a clear answer.
LetsRock says the banks will ask about the (loss-refi) money at time of modification, but thats a modification.
Modification Specialist says, a person receiving a 1099c doesn't have to worry about refi-money on a principle residence no matter what you did with the money (for a short sale foreclosure---irs).
Aneftp says it does matter what you did with the money on a refi (for a short sale or foreclosure---irs)
The answer is obvious. Forrest. I know what you are asking. Because you used the money for non home improvement. (pay off other debt, vacations, cars etc).
It's up to you whether you want to be honest with the IRS when applying for the exemption from 1099C debt taxes owed.
If the IRS audits you and wants to account for the money being spent on home improvements than you have a lot of explaining to do.
But let's be real. The IRS is highly unlikely to audit you.
You make the choice. I copy and pasted the IRS exemption to paying taxes on 1099C in my earlier post. Using that heloc/cash out refinance for non home improvement doesn't qualify for the exemption.
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