14 Mar Tax Fact 5-Refinance Debt for Improvements is Excludable
IRS tax fact number 5 tells us that refinanced debt proceeds used for the purpose of substantially improving your personal residence qualify for exclusion from income if the debt is later is cancelled. In other words, if you re-finance your principal residence home mortgage and use the excess funds (the portion not used to pay off your old mortgage) for substantial improvements to your home, any of that debt, if cancelled, qualifies for the exclustion. The use of loan proceeds is clearly important in determining whether or not later debt cancellation results in taxable income.
If a foreclosure occurs or mortgage debt is forgiven in some other way, it is important to pay attention to what type of debt was involved. If the money was used to buy, build, or substantially improve the principle residence of the taxpayer, it qualifies for exclusion of the Mortgage Forgiveness Debt Relief Act of 2007. If the debt and the money was used to pay off the original loan it is also subject to exclusion from income if it is cancelled. Finally, even if new money comes out of a refinance loan, as long as that money is used to make a substantial improvement in the home, it becomes â€œqualified principle residence debtâ€ and is excludable from income. This statutory exclusion from income is scheduled to expire December 31, 2012.
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