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Posted by Katie on June 9, 2008, 4:58 pm
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> I've read the IRS instructions for Form 982 and also the text of H.R.
> 3648: Mortgage Forgiveness Debt Relief Act of 2007, they both seem to
> say the same thing and leave my question unanswered:
>
> Suppose I have a mortgage loan on primary residence which is part
> qualified, part non-qualified. The property is foreclosed and I have
> cancellation of debt income, which of course I want to exclude from
> taxation to the maximum extent possible (see example below).
>
> My question: given two exclusions: insolvency, and the new qualified
> principal residence indebtedness, are they additive?
>
> For example:
>
> I have a $100K mortgage (a recourse loan) on a property with a FMV of
> zero (to keep things simple), of which $80K is qualified acquisition
> debt eligible for the new exclusion. I am also insolvent to the tune of
> $5K. Can I exclude $80K on Form 982, or $85K?
>
> Now suppose I am insolvent to the tune of $95K. I can elect to exclude
> $95K instead of $80K, but can I also combine them to exclude the full $100K?
>
> (remainder of message is quoted text from tax sources):
>
> Text of the law that I found, very similar to what is in the IRS pub:
>
> "(4) ORDERING RULE- If any loan is discharged, in whole or in part, and
> only a portion of such loan is qualified principal residence
> indebtedness, subsection (a)(1)(E) shall apply only to so much of the
> amount discharged as exceeds the amount of the loan (as determined
> immediately before such discharge) which is not qualified principal
> residence indebtedness."
>
> "(C) PRINCIPAL RESIDENCE EXCLUSION TAKES PRECEDENCE OVER INSOLVENCY
> EXCLUSION UNLESS ELECTED OTHERWISE- Paragraph (1)(B) shall not apply to
> a discharge to which paragraph (1)(E) applies unless the taxpayer elects
> to apply paragraph (1)(B) in lieu of paragraph (1)(E)."
>
> The IRS adds the following language under "Ordering Rule" in the form
> instructions:
>
> "Ordering rule: The remaining [...] nonqualified debt may qualify in
> whole or in part for one of the other exclusions, such as the insolvency
> exclusion."
>
Mark, I haven't looked at anything beyond what you've posted here, but
my reading of it is that as long as you were insolvent to the extent
of at least $20K, you could exclude the entire $100K -- $80K as
qualified debt, and the remaining $20K under the insolvency rules.
Did the committee reports on the bill add any further clarification?
Katie in San Diego
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