The Internal Revenue Service has provided guidance on the federal tax consequences of payments made to homeowners under programs established for the hardest hit housing markets, along with the necessary information reporting requirements.
Notice 2011-14 offers guidance on the tax consequences of payments made to or on behalf of financially distressed homeowners under programs established pursuant to the Treasury Department’s Housing Finance Agency Innovative Fund for the Hardest-Hit Housing Markets and the Department of Housing and Urban Development’s Emergency Homeowners’ Loan Program.
In February 2010, the Treasury Department established the HFA Hardest Hit Fund, which is authorized by the Emergency Economic Stabilization Act. The HFA Hardest Hit Fund is designed to allow each state housing finance agency the maximum flexibility in designing locally focused programs to address the needs of financially distressed homeowners within the state or a specific region of the state. Each state program that receives funding from the HFA Hardest Hit Fund has as its primary objective preventing avoidable foreclosures of homeowners’ homes and stabilizing housing markets.
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The HFA Hardest Hit Fund is available in states where either housing prices have declined more than 20 percent from peak prices or the unemployment rate equals or exceeds the national average. The states eligible for this funding are Alabama, Arizona, California, the District of Columbia, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina and Tennessee.
To receive funding from the HFA Hardest Hit Fund, each of these states submitted proposals describing its programs and verifying that each of the programs would meet the requirements of the EESA and the purposes of the HFA Hardest Hit Fund. Funding under the HFA Hardest Hit Fund is available for, but not limited to, programs involving the following transactions: mortgage modifications, principal forbearance to facilitate additional mortgage modifications, short sales and deeds-in-lieu of foreclosure, unemployment programs, principal reductions for homeowners with severe negative equity, and second-lien reductions and modifications.
If assistance to a homeowner under a state program is structured as a forgivable loan, the IRS said it would treat the disbursements to or on behalf of the homeowner as payments to the homeowner rather than as disbursements of loan proceeds, and those payments are treated as occurring at the time the disbursements are made. Similarly, if assistance to a homeowner under the Emergency Homeowners’ Loan Program or a Substantially Similar State Program is pursuant to a HUD Note, the IRS will treat the disbursements to or on behalf of the homeowner as payments to the homeowner rather than as disbursements of loan proceeds, and those payments are treated as occurring at the time the disbursements are made.
Notice 2011-14 offers further guidance on different scenarios and sections of the Tax Code, state by state information, along with the information reporting requirements. It also provdes a safe harbor method under which a homeowner may deduct on his or her federal income tax return an amount equal to the sum of all payments the homeowner actually makes during that year to the mortgage servicer,
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The IRS notice provides guidance on different scenarios, but it does say that under certain circumstances the payments can be excluded from gross income, and there is also a "safe harbor method":
"Section 61(a) of the Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived. The Service has consistently held, however, that payments made under governmental programs for the promotion of the general welfare are not includible in an individual recipient's gross income (general welfare exclusion). ... Similar to the payments in Rev. Rul. 2009-19, the payments made under the State Programs with funds from the HFA Hardest Hit Fund and the payments made under the EHLP and the SSSPs with funds authorized by the Dodd-Frank Act promote the general welfare by helping homeowners who are at risk of losing their homes either pay their mortgage loans or transition to more affordable housing and do not involve the performance of services. Therefore, payments made under the State Programs, the EHLP, and the SSSPs to or on behalf of a homeowner are excluded from gross income under the general welfare exclusion. "For taxable years 2010, 2011, and 2012, this notice provides a safe harbor method pursuant to which a homeowner may deduct on his or her federal income tax return an amount equal to the sum of all payments the homeowner actually makes during that year to the mortgage servicer, HUD, or the State HFA on the home mortgage, but not in excess of the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums) for years 2010 and 2011 only, and box 5 (real property taxes). This safe harbor method of computing the homeowner's deduction applies for a taxable year if (1) the homeowner meets the requirements of SS 163 and 164 to deduct all of the mortgage interest on the loan and all of the real property taxes on the principal residence; and (2) the homeowner participates in the EHLP, an SSSP, or a State Program described in the Appendix to this notice in which the program payments could be used to pay interest on the home mortgage."
Posted by: MikeCohn | February 24, 2011 5:28 PM
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So are you saying the "payments" to the homeowners is taxable or not?
Posted by: whyiii@charter.net | February 24, 2011 5:13 PM
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