This year we are seeing quit a few individuals with the “Independent Foreclosure Review Payments.” Most of the time they do not know the tax consequences of these payments. The tax consequence are determine by the section numbers (Sections A, B, C, D, or E) related to the payment and the circumstances of the taxpayer.
Section A- Base Payment- May be Income: This is a lump sum payment that would not be considered a reimbursement and therefore taxable. The payment should be reported on Form 1099M as Other Income. The paying agent is only required to report amount in excess of $600 on Form 1099M. Section A Base Payment below $600 would still be taxable.
Section B- Return of Mortgage Interest Paid: This payment represents a return of mortgage interest paid. Taxability will depend on the taxpayer circumstances. If the payment represents a reimbursement of interest previously deduction, taxability dependent on the tax benefits received from the deduction in previous period(s). This payment is reported on Form 1098. The paying agent is only required to report amounts in excess of $600 on Form 1098. Section B Return of Mortgage Interest Paid Payments below $600 may still be taxable based upon the above circumstances.
Section C- Return of Equity: This payment represents a return of the amount of the borrower’s equity in the home. The taxpayer will NOT receive any type of form. The tax treatment would depend on the taxpayer circumstances.
Section E- Return of Fees Paid: This payment represents fee paid by the borrower on their loan. Tax treatment would depend on the borrower’s circumstances and the type of fees paid. The taxpayer will NOT receive any type of form.
Section D- Interest on Other Payment Components: This payment represent interest due on payment due to the taxpayer as a result of Sections A, B, C or E above. This payment is reported on Form 1099 INT. The paying agent is only required to report amounts in excess of $600 on Form 1099 INT. Section E Interest on Other Payment Component Payments below $600 may still be taxable based upon the above circumstances.