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Mortgage Forgiveness Debt Relief Act. Principal Reduction installments, not lump sum

San Francisco, CA |

I've read alot about the Mortgage Forgiveness Act but one thing is still unclear to me. I know the Act is extended to 12/31/2013 but is the debt forgiven in the year in which the contract between the lender and buyer is signed or is it forgiven on a yearly basis when the lender sends the 1099 because it's typical that the bank will defer the forgiveness in 3 installments, one in each year rather than one lump sum, so I'm not sure how this will play out tax wise.

For example:
Lender has sent the final loan modification docs to the buyer in June 2013 in which the buyer will notarize. In the letter, the bank said they will forgive the principal balance ($90k) in 3 yearly installments, each one ($30k) to occur on the anniversary date of when the trial payment began. My question in regards t

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Attorney answers 1


This is my understanding of the Forgiveness of Debt Act: 1. the property has to be your principal residence and 2. the forgiveness applies only to the amount forgiven in that calendar year. So, if you receive a modification with a forgiveness of $90,000 in calendar year 2013, you don't have to pay tax on that amount. However, if the $90,000 forgiveness is divided into 3 yearly installments, then you don't have to pay tax on $30,000 for 2013. If the Act is not renewed, you may have to pay tax on the additional $60,000 when forgiven.

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Thank you for answer. I hope the Act is extended as I hope legislature realize that PRA forgiveness is typically spanned over 3 years and if the goal of the administration was to help struggling homeowners and the economy it doesn't make sense to limit the Act to only several years as that net would not catch the masses. If the Act is expired, would you know whether insolvency can be used for that moment in time the home owners were in financial hardship rather then let's say 3 years down the road they got a new job and made more money, would they be able to use insolvency then when they are now capable of paying the tax?

Antoinette Cara Liewen

Antoinette Cara Liewen


If the Act is not extended, I suggest that you discuss the insolvency provisions with your CPA or tax preparer. I am not a CPA or tax attorney. Good luck !

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