Incentive payments made to borrowers under a “principal reduction alternative” offered by the government’s foreclosure-prevention campaign are generally not taxable, the Internal Revenue Service said today in a guidance announcement for tens of thousands of borrowers.
The IRS said that these incentive payments made by the program’s administrator to mortgage loan holders are treated as payments on the mortgage loans by the United States government on behalf of the borrowers.
“These payments are generally not taxable to the borrowers under the general welfare doctrine,” the agency said in a statement.
If the principal amount of a mortgage loan is reduced by an amount that exceeds the total amount of the incentive payments , the borrower may be required to include the excess amount under gross income as “income from the discharge of indebtedness,” the IRS said.
However, many borrowers will qualify for an exclusion from gross income under the Mortgage Debt Relief Act of 2007, which was extended for another year in the “fiscal cliff” legislation enacted this month.
Treasury and U.S. housing officials established HAMP, the Home Affordable Modification Program, in 2009 to help financially distressed homeowners lower their monthly mortgage payments. But the program has come under fire by homeowner advocates for not reaching enough distressed borrowers and its tough eligibility requirements.
Through November 2012, there were more than 74,000 HAMP modifications underway with earned principal reductions, according to the Treasury’s latest update. That’s less than 9 percent of the total of 846,000 permanent mortgage modifications underway.
HAMP was extended for another year and will now end on Dec. 31 of this year. The initial goal of the Obama Administration was for HAMP to assist up to 4 million borrowers.