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Mortgage Foreclosure or Home Repossession and Your Michigan Income Tax Return

Due to current economic conditions many individuals are experiencing mortgage foreclosure, repossession of their home and/or cancellation of debt. Any change in home ownership has an impact on the preparation of your MI-1040 and homestead property tax credit. This information is for use by those who have been involved in a mortgage foreclosure or repossession of their homes.

Disclaimer: The information contained in these statements should not be construed in any way as business, legal, or other advice, or warranting as fail proof. This information has no legal bearing on any future tax liability. It is intended for your independent use.

List of Topics

  • Definitions
  • Adjusted Gross Income (AGI) and Cancellation of Debt/Forgiveness (COD)
  • Redemption Period
  • Homestead Property Tax Credit Information (Line References)
  • Other Helpful Information
  • Table 1

Definitions

Cancellation of Debt/Debt Forgiveness – Debt forgiveness, also known as cancellation of debt (COD) occurs when a lender forgives all or a portion of a debt. You may receive one of these forms from your lender:

  • Form 1099-C: Cancellation of Debt. This reports any debt cancelled by your lender. The amount of the debt cancelled is shown in box 2
  • Form 1099-A: Acquisition or Abandonment of Secured Property. This is used to compute your federal gain or loss if your home is transferred in a foreclosure.

IRS Publication 523 - Selling Your Home PDF icon

IRS Publication 1099-A and 1099-C PDF icon

IRS Instructions for 1099-A and 1099-C PDF icon

Redemption Period – This is a phase of the foreclosure process which starts with a sheriff's sale and ends when ownership actually changes. It usually takes six months.

Household Income (HHI) – Household income includes all income received by all adult household members during the year, including income that might be exempt from federal adjusted gross income. For a complete listing of income sources to include in HHI see Income and Deductible Items.

Capital Gains – A capital gain is a profit that results from investments in a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor. More Information

Adjusted Gross Income (AGI) – This is the amount from your U.S. 1040 line 37, or U.S. 1040A, line 21.

Adjusted Gross Income (AGI) and Cancellation of Debt/Forgiveness (COD)

  • A COD is generally included in AGI, but can be excluded from AGI under the following circumstances:
    • Discharged
    • In bankruptcy
    • Insolvency (When your liabilities exceed the fair market value of your assets. Assets include everything you own, e.g., car, house, condominium, furniture, life insurance policies, stocks, other investments, or pension and other retirement accounts).
    • Mortgage on a principal residence
  • If a COD is included in AGI it cannot be subtracted on the MI-1040
  • If a COD is included in AGI it must be included in household income
  • When a COD is excluded from AGI, it is not added back on the MI-1040
  • When a COD is excluded from AGI, it must be included in household income

Exceptions:

A COD on a mortgage can be excluded from household income when the lender does not foreclose, but agrees to reduce the amount owed. Ownership of the home does not change. This is sometimes known as a ‘workout’. The owner would likely receive a 1099-C but not a 1099-A.

Note: In a ‘workout’ the COD is not part of household income because any gain or loss on the sale of the house is postponed until the owner sells. The basis – a value used to compute gain or loss on a sale – is adjusted by the COD. As a result, when the owner eventually sells the house he/she may recognize more gain (assuming they sell it for a gain) which will be included in the household income at that time.

IRS Figuring a Gain or Loss PDF icon

Redemption Period

  • During this (usually six months) phase, the owner is entitled to claim a prorated homestead property tax credit for the time they lived in the home during the redemption period even though they may never pay the property taxes.
  • The former owner may not claim property taxes for the time after the redemption period expires. He/she may, however be entitled to the homestead property tax credit for any rent paid to remain living there before ownership changed. The credit must be prorated if the period for which rent was paid is less than 12 months.

Note: Treasury may request copies of the lease agreement, monthly rental receipts and/or canceled checks.

Completing Homestead Property Tax Credit Form MI-1040CR (2013)

  • Property Taxes That Can Be Claimed for Credit (see p. 24 of MI-1040 Instructions PDF icon) – Depending on your situation, property taxes levied/billed on your home in 2013 (even if you have not paid them during the tax year in question), rent paid in 2013 or calculated amounts from MI-1040CR page 2 lines 42, 47 or 49. Note: You may claim property taxes billed, even if you have not paid them during the tax year in question. Exception: If you lived in your primary residence after the redemption period expired you are not entitled to claim the property taxes regardless of whether you paid them or not.
  • Line 19. Capital gains less capital losses (see p. 28, line 19 of MI-1040 Instructions PDF icon)
    • Even if you had a foreclosure, repossession or bankruptcy, it's still possible that you had a capital gain on the home. You will need to determine this by completing the chart (table 1) below. To do that, you will need the closing statements for the original purchase, copies of receipts for capital improvements (dates and what they were), the amount of debt canceled in foreclosure, repossession or bankruptcy.

TABLE 1 – Calculate Capital Gains

Date home originally purchased  
Date home sold  
Sale price of home $
- (minus) Allowable Closing Cost $
- (minus) Commission $
- (minus) Original Purchase Price $
- (minus) Capital Improvement (keep receipts) $
Capital Gain $

 

Additional Resources for Tax Preparation