Mortgage Modification and Taxes

Home Affordable Modification Program (HAMP): The HAMP Principal Reduction Alternative (PRA) was designed to help financially troubled homeowners lower their monthly mortgage payments by reducing the principal amount of a loan if the borrower satisfies conditions during a trial period. In new guidance, the IRS provided that incentive payments made to mortgage loan holders under the program are treated as payments on the loans by the U.S. government on behalf of the borrowers and are generally not taxable to the borrowers. If the principal amount is reduced by an amount greater than the total incentive payment to the loan holder, the borrower may be required to include the excess amount in gross income. The guidance further states that loan holders are required to file Form 1099-C for borrowers who realize discharge of indebtedness income of $600 or more for the year in which a permanent modification of the mortgage loan occurs.