April 14, 2015
April 15th, the tax deadline, is very near, but many people choose to apply to get an extension so they can file their taxes later in the year. If you haven’t completed your taxes for 2014 and are considering an extension, there is some very helpful information about home loans, home loan debt and related issues that may affect those who have FHA home loans or refinance loans. One important issue many borrowers have had to face in recent years is the tax consequences from a home loan modification or similar alteration to a mortgage where part of the debt is forgiven, cancelled, or written off by the lender.
What follows is not tax advice, we are simply quoting what’s printed on the IRS official site. If you have tax questions, please consult a tax preparer or tax expert–we cannot answer questions about taxes in the comments section. That said:
The IRS official site advises borrowers that, “If your lender cancels part or all of your debt, you normally must pay tax on that amount. However, the law provides for an exclusion that may apply to homeowners who had their mortgage debt cancelled in 2014. In most cases where the exclusion applies, the amount of the cancelled debt is not taxable.”
That is very important information for some borrowers to know. Additionally, the IRS says, “If the cancelled debt was a loan on your main home, you may be able to exclude the cancelled amount from your income. You must have used the loan to buy, build or substantially improve your main home to qualify. Your main home must also secure the mortgage.”
For borrowers who applied for a home loan modification, “you may be able to exclude that amount from your income. You may also be able to exclude debt discharged as part of the Home Affordable Modification Program, or HAMP. The exclusion may also apply to the amount of debt cancelled in a foreclosure.”
What about borrowers who had a certain amount of their debt cancelled when refinancing a mortgage loan? “The exclusion may apply to amounts cancelled on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. Amounts used for other purposes don’t qualify.”
Do you have questions about FHA loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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