I obtained an “interest only” home loan in 2005 and have never missed a payment or changed the loan. My payments doubled in 2016 when the agreed on “interest” increased. I applied for and received a Deferred Principal Reduction Amount under that HAMP program. My bank has sent me a 1099-c form for the reduction amount. Is the reduction amount taxable? I live in California which is a non-recourse state. Am I liable for taxes on the Deferred Principal Reduction Amount?
Does a homeowner have income as a result of the government’s having paid some of the homeowner’s mortgage loan by making a PRA investor incentive payment to the holder of the loan?
No. This payment by the government on behalf of the homeowner is excludible from the homeowner’s income under the general welfare exclusion. Excluding this amount from the homeowner’s gross income is consistent with the treatment of Pay-for-Performance Success Payments, which are addressed in Revenue Ruling 2009–19.
If a homeowner benefits from Pay-for-Performance Success Payments under the United States Government’s Home Affordable Modification Program (HAMP), are those payments excludable from income under the general welfare exclusion? FACTS The deep contraction in the economy and in the housing market has created stress for homeowners throughout the country. Large numbers of homeowners are struggling to afford their current monthly mortgage payments and are at risk of losing their homes. In response, the United States Government announced the Homeowner Affordability and Stability Plan (the Plan), which helps at-risk homeowners modify their mortgages to avoid foreclosure. HAMP, a key component of the Plan, helps homeowners who have defaulted, or are at risk of default, on their mortgages because, for example, they are suffering serious hardships, decreases in income, increases in expenses, and high mortgage debt compared to monthly income. Under HAMP, homeowners that make timely payments on their modified loans are eligible to have incentive payments made on their behalf to lenders/investors. Each month that a homeowner makes a mortgage payment on time, the homeowner accrues an amount toward a Pay-for-Performance Success Payment. A payment of the accrued amounts is made annually, to reduce the principal balance on the homeowner’s mortgage loan. Homeowners can receive principal reductions of up to $1,000 per year for up to five years, subject to a de minimis threshold. The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation have a substantial role in administering HAMP. LAW AND ANALYSIS Section 61(a) of the Internal Revenue Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived. Payments under governmental social benefit programs for the promotion of the general welfare and not for services rendered, however, are not includible in a recipient’s gross income (general welfare exclusion). See Rev. Rul. 74-205, 1974-1 C.B. 20; Rev. Rul. 98-19, 1998-1 C.B. 840. Pay-for-Performance Success Payments made under the United States Government’s Home Affordable Modification Program promote the general welfare by helping homeowners who are at risk of losing their homes pay the mortgage loans on their primary residences and do not involve the performance of services. These payments meet the requirements of the general welfare exclusion. HOLDING If a homeowner benefits from Pay-for-Performance Success Payments under the United States Government’s Home Affordable Modification Program, the payments are excludable from income under the general welfare exclusion.