Submitted By: M.
Answered: October 14, 2016 11:30 am

I received HAFA payments. Are they taxable?

The Home Affordable Foreclosure Alternative (HAFA) program encourages lenders (banks) and borrowers (homeowners) to work together to avoid foreclosure. Under the programs, borrowers under water (owning a home worth less than the outstanding balance of the mortgage) received preapproved terms for a short sale. In other words, the lender agrees to accept less than the full amount of the mortgage balance. Homeowners also receive up to $10,000 for relocation assistance through HAFA.

Income from the cancellation of debt on a principal residence is tax free in 2016 (this rule expires at the end of the year unless Congress extends it). Whether the HAFA relocation payment is tax free is unclear because the IRS has not ruled on the matter. However, an argument can be made that it is a government payment to promote the general welfare. Government payments to promote the general welfare are not taxed. If the funds are used for moving expenses, the expenses are covered by tax-free payments could not be claimed as part of a moving expenses deduction.

Tax Glossary

Adjusted basis

A statutory term describing the cost used to determine your profit or loss from a sale or exchange of property. It is generally your original cost, increased by capital improvements, and decreased by depreciation, depletion, and other capital write-offs.

More terms