Congress has extended a valuable protection for New Jersey homeowners facing foreclosure by extending the Qualified Principal Residence Indebtedness (QPRI) exclusion for mortgage loan forgiveness. The QPRI may allow a homeowner who received a 1099 tax form for tax years 2018 or 2019 to exclude the income from taxable income when filing their federal tax returns. Like the exemption for debts discharged in a bankruptcy proceeding, this offers an important tool in finding a solution for foreclosure clients.
QPRI is Important Protection for Homeowners Facing New Jersey Foreclosure
When a homeowner facing foreclosure either chooses to not keep the property or is unable to avoid its loss, they often owe more on the mortgage balance than the home is worth. This may happen when they sell the property via Short Sale, surrender the property under a Deed in Lieu of Foreclosure, or lose the property in a Sheriff’s Sale.
The mortgage company typically will not seek to collect the difference – or loss – and instead will forgive the balance and claim tax deductions for the loss. When the bank claims the loss, the foreclosing mortgage company sends the homeowner a 1099 tax form indicating that the homeowner has received income – or a gain – on the debt forgiveness.
History of the QPRI
In the midst of the recession, on December 20, 2007, The Mortgage Forgiveness Debt Relief Act was enacted to provide various forms of relief to struggling homeowners facing foreclosure. The Act included a provision to allow homeowners who lost their homes and received 1099 Forms from their mortgage companies on forgiven mortgage debt to exclude the income from taxable income.
This protection from federal tax on forgiven mortgage debt – which eventually became known as the Qualified Principal Residence Indebtedness (QPRI) – was originally in place for the years 2007 through 2009. As the recession, continued, the QPRI was extended several times through the tax year 2017.
Congress failed to extend the tax relief protections from 2018 through the end of 2019. A homeowners who was unable to save their home from foreclosure was left with the possibility that they would also owe federal taxes on the amount forgiven by the bank.
QPRI Deduction for Foreclosures Extended
As a part of Taxpayer Certainty and Disaster Relief Act of 2019, Congress extended the QPRI exemption to January 1, 2021 and applies retroactively to the 2018 and 2019 tax years. The extension of the QPRI exclusion allows a taxpayer to exclude up to $2 million of the forgiven debt on their home based on either a reduction in the value of the property or the taxpayer’s financial condition. See 26 U.S.C. § 108(a)(1)(E).
The QPRI exclusion only applies to your main home and to debt discharged from the beginning of 2018 and before January 1, 2021. If you filed a tax return for 2018, you should immediately consult a Certified Public Accountant to consider whether an amended tax return can be filed. Amended tax returns must be filed no later than April 15, 2022, to tax advantage of the retroactive impact of the law.
Debts which are discharged as part of a bankruptcy filing have long-since been excluded from taxation. If a bankruptcy debtor receives a 1099-C (“Cancellation of Debt”) form from a creditor after a bankruptcy filing, the taxpayer may file an IRS Form 982 with their federal income tax return.
For the bankruptcy exclusion, on a Form 982, a taxpayer would check the box on line 1a (“Discharge of indebtedness in a title 11 case”). For the QPRI, you would check the box on line 1e (“Discharge of qualified principal residence indebtedness”). We recommend you consult a CPA though you may also review IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments (for Individuals).
Important impact of QPRI Extension
The extension and retroactive effect of the QPRI is important news for any New Jersey homeowner who has received a 1099 form from a mortgage company for 2019 resulting from a loan modification, short sale, or loss of their home through a foreclosure.
Since the revival of the QPRI was made retroactive to 2018, if you filed a 2018 federal tax return which included income from home mortgage loan forgiveness, you may be able to amend your return to exclude this income if you qualify.
The extension also provides further stability to allow New Jersey homeowners in foreclosure to make decisions about their homes. If a homeowner knows that the mortgage loan forgiveness is excluded from their income taxes, they may be able to decide to let go of a home which is worth extremely less than the amount owed on the mortgage.
WARNING: This is not tax advice
For those reading, information in this article is not meant to replace the advice of a competent CPA or tax attorney. Each situation may be different and it is best to consult your tax professional. For attorneys, unless you are a tax attorney or tax advisor, when considering any tax implications of a foreclosure or loan modification, to obtain the advice of a competent tax attorney or tax accountant.