Financial Planning for Generation X & Y Women
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Expert Q&A Archive

What would be the property tax and credit score implications for loan modifications?
I have a question about the mortgage write-downs and loan modifications that might be happening. If a person had a mortgage that was $295,000, and the property was only worth $220,000 now, if it was possible to get their loan modified down to the new value, maybe at a lower interest rate, 1) what would be the tax implication of that, and 2) how would it affect the credit score?
Michael A. Masiello:
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IF, a big IF, there was to be a modification, I believe it would be on the original amount, not the current value. I think under water stays under water. Not sure of the tax impact or credit score.
Connie K. Marmet:
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The only way your lender would write down a mortgage amount would be if you couldn't pay on the current mortgage, so the action you propose could very well impact your credit rating. I would check with your tax preparer about the tax implications--both what current state and local law allow and how it would impact your particular return.

Bettye J. Banks:
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You are pretty much stuck with what you agreed to pay at the origination of the note, regardless of current market value, BUT my favorite answer to almost any question remains "It depends.” You have nothing to lose by asking, and in a market like the current one, you may have more negotiation room. I strongly doubt that the lender will forgive the difference between current market value and the debt, but you can probably get a reduction in the interest rate. It also depends on your credit history. There are tax consequences if any portion of the debt is forgiven. The lender will submit Form 1099 to the IRS, and you can expect a tax statement on that amount as if it were earned income. The unpaid portion of the debt could show up on the credit report and drive down the score.
Gail Rosen, CPA:
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The new 2007 Mortgage Relief Act excludes from a taxpayer’s gross income any discharge of indebtedness income by reason of a discharge (in whole or in part) of a qualified principal residence indebtedness from January 1, 2007 to December 31, 2009. The exclusion applies where taxpayers restructure (i.e. reduce) their acquisition debt on a principal residence or lose their principal residence in a foreclosure. Here are some of the critical fine points:

• Does not apply to a discharge of second mortgages or home equity loans unless the loan proceeds were used to acquire, construct or substantially improve the taxpayer’s principal residence.
• Does not apply to second homes, vacation homes, business property or investment property.
• Nontaxable forgiven mortgage debt is capped at $2 million ($1 million for married individuals filing separately).

I do not know how it would affect the credit score.