MEDOWS CPA, PLLC a New York tax and accounting firm provides guidance on the recently passed two-year extension of the exclusion from income for the forgiveness of debt on a principal residence. The exclusion now applies to discharges of qualified principal residence indebtedness occurring before January 1, 2017, or discharges that are subject to an arrangement that is entered into and evidenced in writing before January 1, 2017. During the exclusion period, taxpayers who are caught in a mortgage crisis do not have to pay taxes for debt forgiveness on their troubled home loans. Our NYC CPAs can help you determine how these tax regulations apply to you.
Qualified principal residence indebtedness means acquisition indebtedness with respect to the taxpayer’s principal residence. Acquisition indebtedness is defined under the cancellation of debt (COD) income rules in the same manner as used with regard to the mortgage interest deduction, except that where the deduction is limited to $1 million ($500,000 in the case of married taxpayers filing separately) the exclusion of discharged qualified residence indebtedness is limited to $2 million ($1 million the case of married taxpayers filing separately).
An individual’s acquisition indebtedness is indebtedness with respect to that individual’s principal residence if it is incurred in the acquisition, construction, or substantial improvement of such residence and is secured by the residence. Qualified principal residence interest also includes refinancing of such indebtedness to the extent that the amount of the refinancing does not exceed the amount of the refinanced indebtedness.
Debt forgiveness relief was originally granted to taxpayers through the Mortgage Forgiveness Debt Relief Act of 2007, effective for debts discharged after January 1, 2007 and before January 1, 2010. This relief has been extended a few times. Most recently, the Tax Increase Prevention Act of 2014 provided a one year extension of the exclusion to discharges of qualified principal residence indebtedness occurring before January 1, 2015.
In general, according to our chief NYC CPA, the amount of the forgiveness of debt on a principal residence that is included in income is equal to the difference between the amount of the debt being cancelled and the amount used to satisfy the debt. The tax on this income creates an additional burden for taxpayers already struggling financially. The PATH Act extends relief from this burden so that taxpayers may recover faster. These rules generally apply to foreclosure or the exchange of an old obligation for a new obligation.
If you have any questions regarding this provision, New York State taxes, NYC taxes or if you have concerns regarding a home foreclosure, we can answer any questions and discuss your options in greater detail. Please contact our lower Manhattan CPA at your earliest convenience to arrange an appointment.