Are Payments to Financially Distressed Homeowners Taxable?

According to an IRS ruling yesterday, Federal payments are NOT taxable to homeowners. That's good news for many taxpayers. This ruling doesn't come as a big surprise. The IRS has consistently ruled that assistance payments for general welfare from the federal government are not taxable. However, this ruling specifically addresses the HFA Hardest Hit Fund and the Emergency Homeowners' Loan Programs (EHLP). 

The HFA Hardest Hit Fund provides funds to states to assist in preventing avoidable foreclosures and to stabilize housing markets.  It's available in states where unemployment meets or exceeds the national average, or where housing prices have declined more than 20% from peak prices. Florida and Georgia are two of the nineteen states eligible for funding.

Part of the Dodd-Frank Wall Street Reform and Consumer Protections Act, the EHLP provides assistance to homeowners that have experienced a substantial reduction in income as a result of involuntary unemployment or underemployment due to adverse economic or medical conditions, and are at risk of foreclosure.

Notice 2011-14 recognizes that both of these programs promote general welfare, and therefore the payments made to or on behalf of a homeowner are excludable from the taxpayer's gross income. However (and there's always a "however"), the homeowner's Form 1098, Mortgage Interest Statement, will reflect the total of all payments. Taxpayers need to be aware they cannot deduct any amounts on those statements that were not paid by their own funds, including interest, property taxes and mortgage insurance.

In the state of Florida, see Florida Hardest Hit for more information.

First Time Homebuyer Credit - Helpful Hints

If you're planning on claiming the First Time Homebuyer Credit when filing your 2010 tax return, there a few things to keep in mind:

• You must have purchased or entered into a contract to purchase your home by April 30, 2010.
• The definition of a first time homebuyer is you did not own a principal residence for three years prior to the date of purchase.
• The definition of a long term resident homebuyer is you must have lived in the same principal residence for five consecutive years during the eight year period prior the purchase date.
• The maximum credit for the first time homebuyer is $8,000, or $4,000 for individuals who are married filing separate.
• The maximum credit for the long term resident homebuyer is $6,500, or $3,250 for individuals who are married filing separate.
• Claiming the credits will require that you file a paper return, along with Form 5405 and supporting documents, such as properly executed settlement statement, copy of dated certificate of occupancy for new construction homes or retail sales contract for a mobile home purchase.
• In the case of the long term resident credit, it is suggested you attach copies of Form 1098, Mortgage Interest Statement and/or property tax records.

NOTE:  Members of the military have an extra year to purchase a qualifying residence.