An estimated 5 million borrowers in 2013 received payouts from two huge settlements with the biggest banks over alleged foreclosure abuses or mortgage-aid deficiencies since the housing meltdown of 2007-2008.
The individual payouts range from a few hundred dollars to several thousands of dollars, stemming from both the National Mortgage Settlement and the Independent Foreclosure Review.
As this year’s deadline approaches for incomes taxes owed in 2013, mortgage settlement recipients will have to deal with any tax implications. The big question: Will they have to pay taxes on these payouts, which totaled more than $4.5 billion?
The answer from the Internal Revenue Service: Possibly.
All settlement payout recipients should consult with a tax professional. Much depends on the individual circumstances of each payout recipient and whether a loss of a primary residence was involved in a foreclosure or short sale tied to the settlement.
The IRS issued has issued Revenue Ruling 2014-02, which explains how to treat payments under the National Mortgage Settlement. It applies to homeowners whose principal residences were foreclosed by mortgage servicers using techniques which prompted the landmark settlement with the top mortgage servicers. Those techniques included “robosigning,” where there was little or unverified documentation or faulty examinations by qualified bank officials.
IRS ruling issued last month explains how and when the NMS payment qualifies as part of an amount involved in a foreclosure, and whether there are grounds for the taxpayer to exclude from gross income some or all of the gain realized from the payout.
Under the National Mortgage Settlement, most claimants got nearly $1,500 each. In the case of a loss on a single-unit home, the payout amount would only reduce the amount lost in the foreclosure which is not deductible. That means the $1,500 would not increase that borrower’s taxable income, the guidance states.
However, all payout recipients from both settlements are urged to consultant a tax professional.
Independent Foreclosure Review:
Here is what the Office of Comptroller of the Currency has to saw about tax obligations regarding the IFR:
Question: How will my tax obligations or public assistance benefits be affected by the payment I receive from the Independent Foreclosure Review settlement?
Answer: Any payments received as a result of the Independent Foreclosure Review settlement may affect your taxes or public assistance benefits. If you have questions about the impact of this payment on your tax liabilities or public assistance benefits, the Office of Comptroller of the Currency and the Board of the Governors of the Federal Reserve System encourages you to consult a qualified tax advisor, individual or organization prior to cashing the check that you receive.
National Mortgage Settlement:
Here is what the administrators of the National Mortgage Settlement have to say regarding taxes, in a website statement:
The Attorneys General have requested guidance from their tax advisors regarding the tax status of these payments. The guidance is expected to be available in the near future. When it is available we will post it on this website and will provide you with further information regarding the tax consequences, if any, of your payment. If required by the IRS, we will send you the necessary forms and information. Because of the current uncertainty, you may wish to reserve a portion of your payment for possible payment of taxes based on your federal and state tax rates.