Buying a Second Home?
By Administrator | June 30, 2011
Tips for buying a second home and help making a wise decision.
We live 45 minutes from the beach town of Santa Cruz, Ca and have inquiries from many of our clients about beach homes as an investment or second home.
Visitors to Santa Cruz are often taken with the city due to the ocean, the bluffs and the town itself. This leads them to investigate the possibilty of buying a second home. When we talk to buyers about this great opportunity we talk of the location, accessibilty, lifestyle and investment opportunity. Santa Cruz and the outlying beach cities are unique in the fact that are located next to the pacific ocean. While there are lots of beach towns, Santa Cruz has a lack of buildable land which leads to less supply and helps keep home values strong. Accesibilty is another key ingridient. The abilty to easlily travel to your vacation home will enhance your abilities to use it more often. Santa Cruz is located 45 minutes from the San Jose airport. Lifestyle elements are important, do you like to surf, walk on beaches and the bluffs? Recreationaly the sky is the limit with all the things to be done, biking, hiking, visit the board walk.
Finally the investment value needs to be evaluated. Weighing the amount of time you will spend at your second home vs the cost of operating and maintaining the home. Also we need to think about the expected appreciation over time.
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Some Pitfalls to Avoid When Getting a Home Insured
By Administrator | February 21, 2011
Here are some tips the panel shared:
• Each insurance company is different and has its own limitations of coverage, so it’s important to shop around and make sure you are dealing with a true insurance professional who knows the business.
• While there are lenders who may insist that insurance should cover the amount of the loan, insurance companies will only cover the value of the home. The amount an insurance company will cover differs from the appraised value because the appraised value includes land, while home insurance just covers the structure.
• The condition of a house affects insurance coverage more than the age of a house. The following may affect coverage:
- Roof condition – Some companies may deny coverage if an additional layer is placed on top of the original layer.
- Trees and brush in close proximity to the house
- Distance of a fire hydrant or fire station to the house – Some insurance companies will not insure a home if it is more than three miles away from a fire station
- Certain pets
• You have to think in terms of risk. Would you take a risk on a condition that you have observed? Inform you client about a potential problem so it can be fixed right away.
• In the case of condominiums, work closely with the lender. It’s important to know the insurance company that handles the master policy, what the HOA master policy entails, and get a copy of the certification of insurance for the master policy.
• Once you have all insurance documents, get them to your escrow officer as soon a possible.
Call Kelly 408-356-2506
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FAQs About New RESPA (HUD/GFE) Requirements
By Administrator | October 4, 2010
1. Can a borrower’s charges on the GFE change?
• Charges that CANNOT increase: Loan origination charges (all of the lender’s fees, including loan fees, admin., yield spread, warehouse, application, etc.); credits or charges for selected interest rates; adjusted origination charges; transfer taxes. Boxes 1, 2 and 8 from the GFE show lender charges to the borrower that cannot increase. This information is reflected on page 3 of the HUD.
• Charges that CAN increase up to 10 percent: Required services the lender selects – credit report, appraisal, title services and lender’s title insurance, owner’s title insurance (on a sale transaction), recording fees. Boxes 3, 4 and 5 show “Lender Selected Services” that can increase up to 10 percent; also reflected on page 3 of the HUD.
• Charges that CAN change: Required services the borrower selects – third party charges, impound deposits, daily interest charges, homeowner’s insurance (fire/theft). Box 6, 9, 10, and 11 show examples of required third party charges the borrower may select; also reflected on page 3 of the HUD.
2. If the loan origination charges increase, or lender-selected services increase more than 10 percent, who pays? The lender
3. Why are all the title fees charged to my buyer? Isn’t this a seller-pay county?
The lender (or mortgage broker) must disclose all title fees, including the “Owner’s Policy,” even if the buyer is not paying for them. Charges such as these will be credited to the buyer on the HUD-1.
4. Should the borrower bring the GFE to the escrow sign-off?
Yes, under RESPA, the borrower has the right to “inspect the HUD-1 settlement statement, before settlement … and compare it to the GFE,” according to the HUD Settlement Booklet. RESPA further recommends that the borrower should review the HUD-1 “one day prior to the settlement.”
What are the pros and cons? Pros: All loan fees are lumped together, no surprises at signing; shows comparisons of quoted fees vs. actual costs.
Cons: No signature required to prove the borrower received the GFE; charges paid by the seller are now on the buyer’s side; GFE does not reflect the cash required to close.
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Conforming Jumbo loan limit $729,750 in Santa Clara County
By Administrator | October 4, 2010
2010 Conforming Loan Limits Extended Through 2011
This week, the U.S. Congress passed and sent to President Obama for signature a continuing resolution extending through 2011 the current conforming loan limits of $417,000 for most areas in the U.S. and $729,750 for high-cost areas, including Santa Clara and San Mateo counties and most of the Bay Area.
The National Association of REALTORS® and California Association of REALTORS® have long advocated making permanent higher conforming loan limits. As a result of NAR’s and C.A.R.`s lobbying, a provision of the Housing and Economic Recovery Act of 2008 included a temporary increase in the conforming loan limits from $625,500 in high-cost areas to $729,750 and extension of the limits through 2009. Congress and the President extended the higher limits through 2010, and the highest limit was set to go down to $625,000. The Congressional action extends the higher conforming loan limits for Fannie, Freddie, and FHA loans through 2011.
The conforming loan limit determines the maximum size of a mortgage that Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac can buy or “guarantee.”
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Changes to FHA 10/4/2010
By Administrator | September 14, 2010
New Changes to FHA
The U.S. Department of Housing and Urban Development (HUD) has made three recent announcements regarding the Federal Housing Administration (FHA) loan programs. These changes impact annual premiums, qualifying credit scores, and new refinancing programs.
HUD is increasing the annual premium and lowering the upfront premium for FHA-insured mortgages starting October 4, except for Home Equity Conversion Mortgages (HECM). These changes will help FHA be in a better position to address the increased demands of the marketplace and return the Mutual Mortgage Insurance (MMI) fund to congressionally mandated levels without disruption to the housing market. HUD has the authority to increase annual premiums up to 1.55 percent, but is not utilizing its full authority at this time.
For all traditional purchase and refinance products the upfront premium is being decreased to 1 percent. For mortgages involving an original principal obligation of less than or equal to 95 percent of the appraised value of the property, the amount of the authorized annual premium is increased to 1.5 percent (from .50 percent) of the remaining insured principal balance. For mortgages involving an original principal obligation that is greater than 95 percent of the appraised value of the property, the amount of the authorized annual premium is increased to 1.55 percent (from 0.55 percent) of the remaining insured principal balance.
The upfront and annual premiums changes will apply to all mortgages insured under FHA’s Single Family Insurance Programs except for Title I, HOPE for Homeowners (H4H), Section 247 (Hawaiian Homelands), Section 248 (Indian Reservations), Section 223(e) (declining neighborhoods), and Section 238(c) (Military Impact areas in Georgia and New York)
Effective October 4, 2010, in accordance with the final Federal Register Notice on minimum decision credit scores, the new credit requirements for FHA loans are:
• Borrowers with a minimum decision credit score at or above 580 are eligible for maximum financing.
• Borrowers with a minimum decision credit score between 500 and 579 are limited to 90 percent LTV.
• Borrowers with a minimum decision credit score of less than 500 are not eligible for FHA-insured mortgage financing.
• Borrowers with a non-traditional credit history or insufficient credit are eligible for maximum financing but must meet the underwriting guidance in HUD 4155.1 4.C.3.
• Borrowers using 203(h), Mortgage Insurance for Disaster Victims, are eligible for 100 percent financing and no downpayment is required, provided that the borrowers have a minimum credit score of 500.
Again, these new requirements are applicable to all Single Family programs except Title I, Home Equity Conversion Mortgages; HOPE for Homeowners; Section 247; Section 248; Section 223(e) and Section 238.
Also, in an effort to help responsible homeowners who owe more on their mortgage than the value of their property, HUD is providing an additional refinancing option for underwater borrowers. The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth because their local markets saw large declines in home values.
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Make the Most of the current market conditions you are in.
By Administrator | July 31, 2010
We should be mindful that conditions could always be worse. The interest rates are once again at all time historic lows. You need to work with an experieced loan officer even more these days. The lender conditions are often felt to be burdensome and questionable. The rates and stocks are going up and down on any news good or bad. Gold is rising and home prices appear flat. If it makes sense to refianance don’t wait take advantage of it now. If the rates do go lower you can refinance again. But don’t try to market time the rates.
The average interest rate nationwide on a 30 yr fix rate mortgage was 4.57% through 07/08/10, half the nationwide average of 9.15% from January 1995, 15 years ago. (source Freddie Mac)
The USA has had 13 recessions in the last 75 years or 1 every 5.8 Years (source NBER)
We wish you and your family a prosperous last 6 months of 2010.
Call Kevin 408-356-2506 for any home financing needs.
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Buying an Investment Property
By Administrator | April 19, 2010
Why and what to look for in buying a rental property.
1. Rental Income – It is important that the rental income you intend to charge reflects the market value in the area. Look at comparable leases, as sometimes properties are under-rented or over-rented.
2. Mortgage Interest – Get educated on loan options and run the numbers. Give Kevin a Call 408 356-2506 for the down payment required and rates.
3. Taxes – Taxes have a big impact on your operating expenses, as they can go up drastically after a purchase. Unless you intend to occupy the property, your taxes will go up. Check the tax rate and purchase price to determine your future taxes.
4. Vacancy Cost – People tend to forget to check the vacancy rate in the area, which can really impact your investment return. Santa Clara County has a 5 to 8 percent vacancy rate. 4/2010
5. Tenant Turnover Cost – Tenant turnover can vary depending on the location of the property. If the property is next to a college campus, a high turnover can entail significant cost in advertising for a new tenant, cleaning, repainting, etc.
6. Insurance Cost – Insurance on investment properties is typically higher than owner- occupied, single-family properties. You should also purchase liability insurance, which can be expensive.
7. Maintenance Costs – It is hard to anticipate maintenance costs of a property, but you need to take a close look and anticipate necessary maintenance work because it will impact your cash flow. Check the property type (type of roof, walls, balcony, deck, etc.); property size; location; and decide whether you will do the maintenance work yourself or hire it done.
8. Utility Costs – Check what tenants pay for and what the owner pays for, including utilities, lawn maintenance, parking lot lights, trash bin services.
9. Property Management Costs – Will you personally manage the property, or will you hire a property management company? It could save you 10 percent if you manage the property yourself.
Once you add all the numbers, you may find the property has a zero or negative cash flow. It doesn’t necessarily mean you should not purchase the property. You should weigh the cash flow against the positive tax benefits to rental properties. Also, if you think the property is going to appreciate in the future, a zero or negative cash flow could still prove appealing.
The point is, if you are going to consider purchasing investment property, you need to take all the above factors into consideration.
Warm Regards
Kevin and Kelly Cavanaugh
408-356-2506
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Proposition 90 – Assessed Value Transfers
By Administrator | February 26, 2010
Proposition 90 Counties
On February 15, El Dorado County officially joined the list of California counties that accept Proposition 90 inter-county base year assessed value transfers from anywhere in the state. Counties now accepting Proposition 90 transfers include Alameda, El Dorado, Los Angeles, Orange, San Diego, San Mateo, Santa Clara, and Ventura.
Counties accepting inter-county base year assessed value transfers through Proposition 90 extend the same rights of Proposition 60 and 110 (intra-county only) to all residents in the state that move into their county.
Generally, base year assessed value transfers are allowed when:
• As of the date of transfer of the original property, the claimant or the claimant’s spouse is at least 55 years of age or severely and permanently disabled. There is no age requirement for persons who are severely and permanently disabled.
• The claimant and/or the claimant’s spouse has not previously been granted the property tax relief provided by section 69.5. The sole exception to this requirement is if relief was first granted for age, relief can be granted a second time if the claimant or claimant’s spouse subsequently becomes severely and permanently disabled, and has to move because of the disability.
• The original property was eligible for the homeowner’s exemption or the disabled veterans’ exemption either at the time it was sold or within two years of the purchase or new construction of the replacement dwelling.
• As a result of its transfer, the original property must (1) be subject to reappraisal at its current full cash value in accordance with sections 110.1 or 5803; or (2) receive a base year value determined in accordance with section 69 (intra-county disaster relief), section 69.3 (inter-county disaster relief), or section 69.5 because the original property qualified as a replacement property under one of those sections.
• The replacement dwelling is purchased or newly constructed within two years of (before or after) the sale of the original property.
• The replacement dwelling must be eligible for the homeowner’s exemption at the time the claim is filed.
• The replacement dwelling must be of equal or lesser value as compared to the original property.
• If the original property was substantially damaged or destroyed by misfortune or calamity and sold in its damaged state, the full cash value is determined immediately prior to the misfortune or calamity.
• The claimant must file a claim for property tax relief under this section within three years of the date the replacement dwelling was purchased or the new construction of the replacement dwelling was completed.
The above requirements were taken directly from guidance issued by the State Board of Equalization in 2006.
El Dorado County requires an application fee of $500 for Proposition 90 transfers, payable to the Assessor’s Office.
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New Information on Home Buyer Tax Credits
By Administrator | January 9, 2010
Late last year the U.S. Congress passed an extension of the federal home buyer tax credit that will run until April 30 of 2010. The extended credit is now accessible to repeat buyers. Below is a quick outline of the updated rules.
First-time Home Buyers:
• To qualify as a “first-time home buyer” the purchaser or his/her spouse may not have owned a residence during the three years prior to the purchase.
• Available for purchase of home between November 7, 2009 and April 30, 2010.
• The maximum allowable credit is $8,000.
Current Home Owners:
• Current home owners purchasing a home between November 7, 2009 and April 30, 2010, who have used the home being sold or vacated as a principal residence for five consecutive years within the last eight.
• In order for married purchasers to qualify, both individuals must have lived in the same residence for five consecutive years out of the last eight. If one spouse has lived in the house for five years and the other moved in later, after they were married, then they are both excluded from the buyer tax credit.
• The maximum allowable credit for current homeowners is $6,500.
Other Qualifications:
• Credit may be applied to primary residences, including: single-family homes, condos, townhomes, and co-ops.
• Credit may only be awarded on homes purchased for $800,000 or less.
• Credit, which became effective on November 7, 2009, single buyers with incomes up to $125,000 and married couples with incomes up to $225,000 – may receive the maximum tax credit.
• The credit decreases for buyers who earn between $125,000 and $145,000 for single buyers and between $225,000 and $245,000 for home buyers filing jointly. The amount of the tax credit decreases as his/her income approaches the maximum limit. Home buyers earning more than the maximum qualifying income – over $145,000 for singles and over $245,000 for couples are not eligible for the credit.
• Under the Extended Home Buyer Tax Credit, as long as a written binding contract to purchase is in effect on April 30, 2010, the purchaser will have until July 1, 2010 to close.
• According to the IRS, in situations in which two unmarried buyers purchase a residence together where one qualifies for the $6,500 repeat buyer credit and the other qualifies for the $8,000 credit, a repeat buyer cannot receive a tax credit higher than $6,500 and the total amount claimed by both buyers cannot exceed $8,000. For example, the repeat home buyer could claim $6,500 and the first-time home buyer could claim $1,500. Alternatively, both buyers could claim a $4,000 tax credit.
If you or your client purchased a home between January 1, 2009 and November 6, 2009, you will fall under a different set of rules that can be found at the following site: 2009 First-Time Home Buyer Tax Credit.
This week California also took a step closer to considering a similar tax credit. During his State of the State address, Governor Schwarzenegger announced his 2010 proposals for California. Included in the proposals is a recommendation to set aside $200 million for a new round of $10,000 state tax credits for first-time home buyers. The proposal expands upon the initial $10,000 state tax credit by including both new and existing homes. Last year’s tax credit applied only to new homes.
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The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
By Administrator | January 6, 2010
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.
The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:
What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
These exceptions are discussed in detail in Publication 4681.
What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.
What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing
separately.
Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.
How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.
Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.
If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.
Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.
Where can I get this form?
If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.
How do I know or find out how much debt was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.
Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.
If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.
I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.
If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt?
Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was canceled in a title 11 bankruptcy case. An exclusion is also available for the cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a Midwestern disaster area. See Form 982 for details.
If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?
Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Will I receive notification of cancellation of debt from my lender?
Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.
What if I disagree with the amount in box 2?
Contact your lender to work out any discrepancies and have the lender issue a corrected Form 1099-C.
How do I report the forgiveness of debt that is excluded from gross income?
(1) Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.
(2) File Form 982 with your tax return.
My student loan was cancelled; will this result in taxable income?
In some cases, yes. Your student loan cancellation will not result in taxable income if you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation.
Are there other conditions I should know about to exclude the cancellation of student debt?
Yes, your student loan must have been made by:
(a) the federal government, or a state or local government or subdivision;
(b) a tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are considered public employees; or
(c) a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization.
Can I exclude cancellation of credit card debt?
In some cases, yes. Nonbusiness credit card debt cancellation can be excluded from income if the cancellation occurred in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See the examples in Publication 4681.
How do I know if I was insolvent?
You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.
How should I report the information and items needed to prove insolvency?
Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation. You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.
To claim this exclusion, you must attach Form 982 to your federal income tax return. Check box 1b on Form 982, and, on line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately prior to the cancellation. You must also reduce your tax attributes in Part II of Form 982.
My car was repossessed and I received a 1099-C; can I exclude this amount on my tax return?
Only if the cancellation happened in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See Publication 4681 for examples.
Are there any publications I can read for more information?
Yes.
(1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues.
(2) See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov.
Page Last Reviewed or Updated: May 19, 2009
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