Patricia Paruch, Kemp Klein Law Firm
Revisiting the Mortgage Forgiveness Debt Relief Act of 2007
By Matthew B. Theunick, Trott & Trott PC
Late last year, Congress extended tax relief for persons who have lost a home due to foreclosure. The Internal Revenue Code (26 U.S.C.A. § 61(a)) defines "gross income" as "all income from whatever source derived." "Gross income" includes cancelled debt unless an applicable exclusion applies.
After the recent real estate market readjustment, Congress amended the tax code in 2007 to exclude discharges of indebtedness on principal residences from gross income (Mortgage Forgiveness Debt Relief Act of 2007, 110 P.L. 142). This exclusion provides relief to underwater homeowners on foreclosures, short sales, deeds-in-lieu of foreclosure, mortgage refinances, and other loan modifications.
This amendment to § 108(a)(1)(E) of the tax code notes that an exclusion from gross income would include "qualified principal residence indebtedness which is discharged before January 1, 2010." Congress subsequently revised the discharge date to January 1, 2014. (American Taxpayer Relief Act of 2012, 112 P.L. 240). The government's actions now allow homeowners to exclude up to $2 million of certain debt forgiven or $1 million for a married person filing a separate return.
A key provision of the Act is that debt reduced through mortgage restructuring as well as through foreclosure may qualify. A qualified homeowner can claim the exclusion by filling out Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness," and attaching it to their return. Additionally, if debt is reduced or eliminated, the homeowner can expect to receive a year-end statement Form 1099-C, "Cancellation of Debt," from the mortgage lender.
Any further extensions beyond the January 1, 2014, discharge cut-off will depend on Congress and the state of the economy. In the meantime, lawyers advising clients undergoing foreclosure or debt restructuring should recommend that they explore this exclusion with their tax advisor.
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April 18, 2013
May 2, 2013
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The "Cottage Tax" and the Parent-Child Transfer
By Jennifer M. Savel and Thomas Treppa, Giarmarco, Mullins & Horton, PC
The Legislature recently added another exception to the definition of "transfer of ownership" under the uncapping provisions of the General Property Tax Act (Act). Public Act 497 of 2012 provides that effective December 31, 2013, transfers of "residential real property" (as defined in MCL 211.34c), from a transferor to a transferee who is related by blood or affinity to the first degree are not "transfers of ownership" and do not "uncap" the taxable value of the property, provided that the use of the property does not change following the transfer. MCL 211.27a(7)(s). The Legislature added this exception to permit parents to transfer residential real property to children without triggering an uncapping of taxable value.
An interesting yet unanswered question is why the Legislature did not also include transfers to a child from a parent's revocable trust or from a decedent's estate. Today many parents own residential real property in the name of their trusts. It seems that the same exception should apply to a transfer of property from a parent's revocable trust or a parent's estate to a child. However, neither a trust nor an estate would be related to the child "by blood or affinity" and the new provisions of subsection (7)(s) would not apply. Although a parent might be able to deed the property back from the trust to the parent and then back out to the child, this appears to be a totally unnecessary exercise. If the rationale underlying the new provision is sound in the context of a transfer by a person, the same rationale should apply in the case of transfers from a trust or an estate. The Legislature should consider further amendments to the Act to include those transfers.
The views and opinions expressed in these articles are those of the authors, and they do not reflect in any way the positions of the State Bar of Michigan or the Real Property Law Section. These columns are meant for informational purposes only and should not be construed as legal advice.