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The Tax Guy: Tax Consequences of Home Mortgage Foreclosure

The Tax Guy

Many homeowners around the Valley are falling behind in their mortgage payments, in large part due to adjustable rate mortgages (ARMs) that have reset to higher rates. The delinquency rate for mortgage borrowers continues to increase, and a record number of homes are entering the foreclosure process.

The tax consequences that accompany a home mortgage foreclosure can further weaken an already tenuous financial condition. When a lender forgives any portion of a mortgage loan, taxable "cancellation of debt" income generally results. The lender will then issue the borrower a 1099-C for the loan amount forgiven. Clients are generally shocked and upset that they now must pay income taxes on this same amount that couldn’t pay for in the first place.

However, there are several instances where cancellation of debt income is not taxable, the most common involving bankruptcy, insolvency, qualifying farm debts and non-recourse loans. It should be noted that most homeowners whose homes are foreclosed do not also file for bankruptcy (this decision should be discussed individually with a financial advisor to determine its appropriateness). 

A taxpayer that owes additional tax due to a home mortgage foreclosure can request a payment agreement with the IRS, or may qualify to enter into an offer-in-compromise (OIC) that will provide a partial abatement of the tax. This process can be lengthy but may be well worth the effort (Note: During the past 2 years, the IRS has substantially tightened the qualifying conditions for OICs). 

Another component of the home foreclosure scenario is capital gain income. Because a home foreclosure is treated like a sale, capital gain is recognized if the property's fair market value exceeds its basis. However, a taxpayer may exclude up to $250,000 ($500,000 for joint filers) of this gain if the property was owned and used as a principal residence for two of the previous five years.

If the home was held as a rental property the gain will be taxed at rates determined by the holding period of the seller. As a rental property, the seller will also be entitled to take any capital losses from the sale to offset other capital gains or offset ordinary and wage income up to $3,000 a year carried forward until the capital loss is spent.   

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than nine years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please visit southerncpafirm.com to reach Jermaine for additional questions with regard to this article or other tax assistance.

Five Great Restaurants for Romance in the Phoenix Area

I've had a few of my boys ask me for recommendations on romantic restaurants in the Valley of the Sun for Valentine's Day.

I'd like to think that these grown men would show their women how much they love them by taking the time to research their own Valentine's Day restaurants.

However, I understand that people get busy and need a little help.

Thus, Mr. PhxSoul.com is coming to your rescue with MY list of Five Great Restaurants for Romance in the Phoenix area!

Make your reservations now!

5. Chelsea's Kitchen - 5040 N. 40th St., Phoenix.

I love the energy here. You could have a great time at Chelsea's Kitchen whether you're having dinner for two or with a group of friends. I love the bar/patio area and the food is really good. Read my article about Chelsea's Kitchen for more info.

4. Mastro's City Hall - 6991 E. Camelback Road, Scottsdale.

I took my baby here for our first anniversary and received some of the best service I've ever had in my life! The food is tremendous and the restaurant has a great ambiance with live music!

3. Rokerij - 6335 N 16th St., Phoenix.

A very charming restaurant with some of the best food in town! It's a nice, cozy, dark restaurant with big booths and a fireplace. You'll see the specials of the day written on chalkboards that lined the wooden walls - a real cool touch. Make sure you visit the bar downstairs before you eat and/or after you finish your dinner, it's one of the best places to get a drink in Phoenix!

2. Talavera at the Four Seasons Resort - 10600 E. Crescent Moon Drive, Scottsdale

Let me start by staying that I know this place is EXPENSIVE! I took my wife here on our first anniversary in August 2009 and I nearly choked when I got the bill. But the experience was worth every dime. We sat on the patio and couldn't help but to smile at the amazing views of the Valley of the Sun at night. We were surrounded by beautiful desert scenery and friendly people inside the restaurant. The service was impeccable and the appetizers, main course and dessert were all delectable! You have to experience Talavera at least once in your life!

1. Compass Room at The Hyatt Regency - 122 N Second St., Phoenix.

You can't beat the extraordinary views of the Valley of the Sun while dining in this restaurant. The Compass Room slowly rotates in a circle so you can see the entire Phoenix area! The food is above average, but the romance and scenery can't be beat.

• I encourage you to visit my Food & Drink and Music pages for more Romantic ideas!!

If you want to share your Romantic Restaurant suggestions with other PhxSoul.com readers, leave them in the COMMENTS area!