What You Need to Know About Forgiven Mortgage Debt (2015 - 2016 Rules)

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The tax break for forgiven mortgage debt was extended until December 31, 2016, and retroactively impacts forgiven mortgage debt in 2015. This means that you won't be required to pay income taxes on mortgage debt that was forgiven you in 2015 or 2016 as long as:

1. The total amount of mortgage debt forgiven you is under $1mm; and,
2. The forgiven mortgage debt was specifically used to buy, build or improve your primary residence.

For example, if the lender forgives you $50,000 in debt, and your income tax bracket is 25%, you would normally owe the IRS $12,500.  However, if this forgiveness of debt took place in 2015 or 2016 under the conditions outlined above, you wouldn't owe the IRS anything!

The "Insolvency" Exception

Here's an interesting twist: you would owe taxes on the forgiven mortgage debt if the mortgage funds were NOT used buy build or improve your primary home.  The only way around that is what's known as the "insolvency exception".  This rule states that there's no tax on the forgiveness of debt if you are "insolvent" at the time of debt cancellation. Insolvent simply means that your total debts are greater than your total assets. In our example, assume your total assets are $20,000 and your total liabilities are $70,000. This means that your net worth would be negative $50,000. This would make you "insolvent" according to the IRS, and you wouldn't have to pay any taxes at all on the $50,000 in forgiven mortgage debt! Keep in mind that when you calculate your assets, you need to include everything you own, including exempt assets beyond the reach of creditors under the law, such as interest in a pension plan and the value of your retirement account.

PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 4681.

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Jay Sibley 321-689-0089
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828