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Old 12-18-2012, 12:23 PM
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Mortgage Debt Forgiveness

I'm trying to do a bit of planning for my upcoming tax filings and I'm wondering whether I'll be eligible for the exemption of debt forgiveness under the Mortgage Relief Act. I sold my home in a short sale in Sept 2012. The complicating aspect is that I hadn't been living in the home for awhile.

Here's a basic timeline:
May 2007: House bought (in IL). Moved in.
September 2008: I took a leave of absence from my job for 10 months to do volunteer work. Placed in WI for volunteering. WI was NOT considered my primary residence. I rented the house to some friends of friends during this time.
April 2009: Laid off from job (that I was on leave from)
July 2009: Moved back into house in IL (but unemployed)
December 2009: Find a job...in WI. Rent place to live in WI.
Jan 2010: Attempt to rent to friends again while figure out what to do with IL house.
July 2010: House listed for sale
Sept 2011: Last renters move out and I give up on the hassle of renting and leave house empty.
Sept 2012: House sold.

So I'm not even sure how this house is classified to me. It's probably borderline whether I can say I lived there 2 of 5 years. I did complete schedule E for rental income for the end of 2008 and the 2009-2011 tax years. I did not plan on doing this for 2012 as I made no attempt to rent the house.

Tax-wise, I know it really hasn't been my principal residence for the past few years as I've been filing WI taxes and claiming rental income on it. I just don't know if I lived there long enough as a primary residence to qualify for the exclusion. It was my legal address (and I was on the utility bills) from May 2007 - December 2009, but I also had rental income during that time as well.

If I need to claim the forgiven debt as income, I'm ok with that, but obviously my preference is not to if that is a possibility. Any advice would be appreciated.

Thanks!
-Lauren



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Old 12-18-2012, 10:15 PM
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“ I sold my home in a short sale in Sept 2012. The complicating aspect is that I hadn't been living in the home for awhile.”----=> Individuals who lost their homes through foreclosure will not have to pay income tax on the amount of mortgage debt that was forgiven or canceled. Tax-free treatment is also available to people who restructured their mortgages loans for a lower balance. The tax-free exclusion applies to canceled mortgage debt of up to $2 million (or $1 million is married and filing a separate return). The house must have been used as a main home, which means it was the principal place of residence for the debtor. Also, the debt must have been used to buy, build, or make substantial improvements to the residence. If you sold your main home and made a profit, you may be able to exclude that profit from your taxable income.

In general, you can exclude up to $250K in profit from the sale of a main home (or $500K for a married couple) as long as you have owned the home and lived in the home for a minimum of two years. Those two years do not need to be consecutive. In the 5 years prior to the sale of the house, you need to have lived in the house for at least 24 months in that 5-year period. In other words, the home must have been your principal residence.

Here's a basic timeline:
May 2007: House bought (in IL). Moved in.
“September 2008: I took a leave of absence from my job for 10 months to do volunteer work. Placed in WI for volunteering. WI was NOT considered my primary residence. I rented the house to some friends of friends during this time.”--------->I guess you were a non resident of WI and was a full year resident of IL. Generally, the principal residence is the home you live in most of the time, even if you only rent it.
“April 2009: Laid off from job (that I was on leave from);July 2009: Moved back into house in IL (but unemployed);December 2009: Find a job...in WI. Rent place to live in WI.;Jan 2010: Attempt to rent to friends again while figure out what to do with IL house. ;July 2010: House listed for sale;Sept 2011: Last renters move out and I give up on the hassle of renting and leave house empty.;Sept 2012: House sold.”----------->Principal residence ;it depends on all the facts and circumstances of each case, including the good faith of the taxpayer. Usually it is the home in which you live most of the time, whether you own it or rent it. In your case, your home in IL is your principal residenceThe mere fact that the property is or had been rented does not determine that it is not your principal residence. For example, if you buys your new residence before you sell your old one, the fact that you temporarily rent out the new residence before you vacate the old one may not, in itself, prevent the new residence from being considered your principal residence.

“So I'm not even sure how this house is classified to me. It's probably borderline whether I can say I lived there 2 of 5 years.”------->So, you bought the house and lived in the house from May 2007-Sep 2008(for16months) and used as rental from Sep 2008-Jul 2009(for 11months) and also lived in house from Jul 2009-Jan 2010(for 6 months) and also used it as rental from Jan 2010-Sep 2011(for 20 months), So, you used it as home for 22months (less than 24months) during the five year from May 2007-Sep 2012, however, you lived in the house for less than 2 years(<24months), you can’t exclude up to $250K in profit from the sale of a main home (or $500K for a married couple) a as you have NOT lived in the home for a minimum of two years.But, a reduced exclusion may be claimed if you do not meet the use and ownership tests, but the primary reason you sold the home was health, change in place of employment or unforeseen circumstances.
“ I did complete schedule E for rental income for the end of 2008 and the 2009-2011 tax years. I did not plan on doing this for 2012 as I made no attempt to rent the house.”----> Correct; yiu had to file Sch E of 1040 to report your rental income to the IRS.


Last edited by Wnhough : 12-19-2012 at 06:56 AM.


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