Discussion:Debt Cancellation and Private Mortgage Insurance

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Discussion Forum Index --> Advanced Tax Questions --> Debt Cancellation and Private Mortgage Insurance


Discussion Forum Index --> Tax Questions --> Debt Cancellation and Private Mortgage Insurance

KMiller (talk|edits) said:

6 February 2009
Is the amount of debt canceled still considered income when the taxpayer had private mortgage insurance to cover it? This taxpayer had investment property that was going to be foreclosed on by the bank but the property was sold by the taxpayer before foreclosure. The bank agreed to accept the sales price which was less than the mortgage. The taxpayer had private mortgage insurance and the insurance company paid the bank the remaining balance on the mortgage. Would this situation still qualify as a canceled debt when the bank received the full amount of the mortgage? And, would the taxpayer have to report taxable income? Is it a valid argument that this wouldn't be considered taxable income because the bank didn't actually suffer a loss? How anyone encountered this particular situation?

Kevinh5 (talk|edits) said:

6 February 2009
yes

Solomon (talk|edits) said:

6 February 2009
Did the bank send a 1099-C?

Kevinh5 (talk|edits) said:

6 February 2009
what the bank eventually got paid is not material when you are doing the borrower's return. 'How much did the borrower pay' is what matters for the borrower's return.

AEM CPA (talk|edits) said:

6 February 2009
The taxpayer has income, the insurance company has expense, the bank broke even.

KMiller (talk|edits) said:

6 February 2009
The bank did send a 1099-c. Can anyone explain the purpose for having this insurance? If someone pays the premium on this particular insurance and there comes a point when they have file a claim for the insurance company to pay the shortfall, why doesn't this count as a full payment of the mortgage? Isn't that the purpose for having this insurance in the first place? I don't get why this would still be considered taxable income. Can someone explain it better?

Kevinh5 (talk|edits) said:

6 February 2009
The insurance is to protect the bank from deadbeat borrowers.

Kevinh5 (talk|edits) said:

6 February 2009
it doesn't protect anything for the homeowner - if it did, he would still be in the home.

Riley2 (talk|edits) said:

6 February 2009
The PMI insurance is a type of guarantee contract. When the guarantor makes the lender whole after a default, the borrower then becomes liable to the insurance company. Thus, the PMI insurance company doesn't really represent the borrower at all.

AEM CPA (talk|edits) said:

6 February 2009
The lender is the insured, since they're the ones taking the risk by lending to people who may turn out to be deadbeats.

Why do people complain about having to pay tax on COD income? YOU'RE NOT PAYING YOUR DEBT ANYMORE. The tax is probably 15 cents on the dollar. That's not enough of a deal?

Kevinh5 (talk|edits) said:

6 February 2009
because they feel like they lost enough already - with the foreclosure of their home, etc.

AEM CPA (talk|edits) said:

6 February 2009
Maybe it's just because I'm an accountant and therefore heartless, but I don't see something as "yours" if it's mortgaged. I always tell my wife that the bank owns our house and we're allowed to live in it as long as we follow their rules.

Death&Taxes (talk|edits) said:

6 February 2009
Does anyone think the PMI insurance companies are going to 'round up the usual suspects,' meaning more than the debtor, when they realize that with any kind of due diligence, some people should not have been given mortgages? When I remember some of the clients who called me during years 2005-06 regarding new purchases, I come to realize something was going on out there to keep the balloon inflated.

btw, my friend JP bought in Union County NJ for zilcho down in November 2008, 190K and pays 2800 a year for PMI. Her lender? Anyone want to guess?

Ddoshan (talk|edits) said:

6 February 2009
I think it is still crazy out there. Client today refianced home in Dec 08 (250,000) paid over 13,000 in various fees to do the refinance. Kind of made me sick.

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