I've read the IRS instructions for Form 982 and also the text of H.R.
3648: Mortgage Forgiveness Debt Relief Act of 2007, they both seem to say the same thing and leave my question unanswered:Suppose I have a mortgage loan on primary residence which is part qualified, part non-qualified. The property is foreclosed and I have cancellation of debt income, which of course I want to exclude from taxation to the maximum extent possible (see example below).
My question: given two exclusions: insolvency, and the new qualified principal residence indebtedness, are they additive?
For example:
I have a $100K mortgage (a recourse loan) on a property with a FMV of zero (to keep things simple), of which $80K is qualified acquisition debt eligible for the new exclusion. I am also insolvent to the tune of $5K. Can I exclude $80K on Form 982, or $85K?
Now suppose I am insolvent to the tune of $95K. I can elect to exclude $95K instead of $80K, but can I also combine them to exclude the full $100K?
(remainder of message is quoted text from tax sources):
Text of the law that I found, very similar to what is in the IRS pub:
"(4) ORDERING RULE- If any loan is discharged, in whole or in part, and only a portion of such loan is qualified principal residence indebtedness, subsection (a)(1)(E) shall apply only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before such discharge) which is not qualified principal residence indebtedness."
"(C) PRINCIPAL RESIDENCE EXCLUSION TAKES PRECEDENCE OVER INSOLVENCY EXCLUSION UNLESS ELECTED OTHERWISE- Paragraph (1)(B) shall not apply to a discharge to which paragraph (1)(E) applies unless the taxpayer elects to apply paragraph (1)(B) in lieu of paragraph (1)(E)."
The IRS adds the following language under "Ordering Rule" in the form instructions:
"Ordering rule: The remaining [...] nonqualified debt may qualify in whole or in part for one of the other exclusions, such as the insolvency exclusion."
-Mark Bole