Canceled debt is normally taxable to you, but there are exceptions. One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.
The IRS would like you to know these 10 facts about Mortgage Debt Forgiveness:
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit www.irs.gov. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, is also an excellent resource.
You can also use the Interactive Tax Assistant available on the IRS website to determine if your cancelled debt is taxable. The ITA takes you through a series of questions and provides you with responses to tax law questions.
Finally, you may obtain copies of IRS publications and forms either by downloading them from www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
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Gregg D. Killoren
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U.S. High-Yield Corporate Bond Defaults Increase in 1Q 2012: Fitch
Fitch Ratings has reported that three high-yield corporate bond issuers defaulted on $0.6 billion in bonds in February 2012, bringing the year-to-date speculative grade default tally to $2.5 billion. The trailing 12-month rate remained steady at 1.7 percent. However, at mid-March, four issuers had defaulted on an additional $1.6 billion in bonds. Recent activity brings the defaulted issuer count to 10 for the year so far on $4.1 billion in bonds, up from just four issuers and $0.8 billion in the first quarter of 2011.
The weighted average recovery rate on secured issues in the first two months of the year was 72 percent of par, versus 23.6 percent for unsecured bonds.
Steady February, Uptick in March: Three issuers defaulted on $0.6 billion in bonds in February, bringing the year-to-date default tally to $2.5 billion. The trailing 12-month rate remained steady at 1.7 percent. At mid-March, however, four issuers had defaulted on an additional $1.6 billion in bonds, including a large distressed debt exchange from Mohegan Tribal Gaming Authority. Recent activity brings the defaulted issuer count to 10 thus far in 2012 on $4.1 billion
in bonds, up from just four companies and $0.8 billion in the first quarter of 2011.
Recovery Rate Details Critical: The weighted average recovery rate on defaults through February was 53.6 percent of par. Due to changes in issuance patterns in the years just prior to the credit crisis, secured bonds have been more heavily represented in the recent batch of defaults and as such continue to boost overall recovery rates. The average recovery rate on secured issues in the first two months of the year was 72 percent of par, versus 23.6 percent for unsecured bonds.
Issuance on a Tear: New issuance was exceptional in the first two months of the year, totaling $55.7 billion, matching activity in early 2011. The rating mix of bonds has also been roughly in line year over year, with 40 percent of volume rated ‘BB’, 45 percent ‘B’, and 15.5 percent ‘CCC’ or lower. While robust, ‘CCC’ or lower issuance is nonetheless running below the tier’s market weight of 18.9 percent. In addition, defaults continue to originate overwhelmingly from this group, showing that despite investor demand for higher yielding assets, weak companies are not receiving a free pass.
Investor Survey Highlights: The latest Fitch Ratings/Fixed Income Forum Survey of Senior Fixed Income Investors found some noteworthy bullish sentiment surrounding U.S. corporate credit conditions and high yield in particular. A majority of participants, 90 percent, project that the high yield default rate will remain below 3 percent in 2012, 80 percent expect lending standards to further loosen over the coming year, and 68 percent believe high yield spreads will tighten. Fund flows into high yield have been positive for 15 consecutive weeks (see page 9).
Grace Period Defaults Update: Over the past four years, 17 companies in Fitch’s default index missed scheduled interest payment dates but cured the shortfalls within the typical 30-day grace period allowed under most bond indentures. Fitch has monitored these companies and has observed that 11 subsequently missed another payment or restructured, showing the seriousness of the ‘grace period’ miss. The average price of the affected bonds fell further on the formal default event, from 44.6 percent following the first cured shortfall to 37.5 percent.
The Energy Menace: To date, higher energy prices do not appear to have had a meaningful effect on consumer spending. This, however, remains a key risk to the otherwise constructive outlook for defaults in 2012. Fitch projects a year-end default rate in the range of 2.5–3.0 percent.
Here is a link to the report (registration may be required): http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=673581
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Posted in Corporate Bonds, Fixed-Income, Investing, Market Commentary, Personal Finance
Tagged Corporate Bonds, Fixed-Income, High-Yield Bonds, Investing, Personal Finance