IRS Guidance on Federal Tax Consequences of, and Information Reporting Requirements for, Certain Payments Made to Financially Distressed Homeowners

The IRS today released an advance copy of Notice 2011-14, providing guidance on the federal tax consequences of—and information reporting requirements for—payments made to or on behalf of financially distressed homeowners under programs established under two programs: (1) the Treasury Department’s Housing Finance Agency Innovative Fund for the Hardest-Hit Housing Markets; and (2) the Department of Housing and Urban Development’s Emergency Homeowners’ Loan Program.

Today’s notice also provides guidance on the information reporting requirements for these payments.

For an electronic version of today’s 17-page release: Notice 2011-14

Notice 2011-14:

• Applies to those programs designed by state housing fund agencies that are listed in an appendix to today’s release
• Provides guidance on the federal tax consequences of, and information reporting requirements for, payments made on behalf of financially distressed homeowners under the Department of Housing and Urban Development’s Emergency Homeowners’ Loan Program and any existing state program receiving funding under this program (known as “substantially similar state programs”)
• Addresses whether (1) disbursements under a “forgivable loan” or a HUD Note are treated as payments to homeowners and not as disbursements of loan proceeds; (2) homeowners who receive or benefit from payments made under the listed programs may exclude the payments from gross income and deduct otherwise deductible expenses (for example, mortgage interest and real property taxes) paid from those payments; and (3) payments to or on behalf of homeowners made under the describecd programs are exempt from the information reporting requirements

Notice 2011-14 will appear in Internal Revenue Bulletin 2011-11, dated March 14, 2011.

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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