Mortgage Debt Forgiveness
Will I be taxed on my mortgage debt forgiveness amount?
Contrary to popular belief, the government is trying to provide some debt relief help to homeowners during the recent difficult times. I found an interesting article on the IRS website that may help you if you were one of the lucky ones to get mortgage debt forgiveness.
Let's talk about debt settlement and the IRS. What are the implications on your taxes?
Under normal circumstances, canceled or settled debt is considered taxable income by the IRS.
However, there is an exception to that rule. If you are one of the many homeowners who had no choice but to do a short sale and settle your mortgage debt, you may be exempt if the debt was settled during tax years 2007 through 2012.
The IRS has 10 facts listed on their website about this exception. I'm going to summarize here.
- Under the Mortgage Forgiveness Debt Relief Act of 2007, you could be able to exclude up to 2 million of forgiven debt if the debt settlement was on your principle residence.
- The limit is only 1 million if you are married and file a separate return from your spouse.
- You can also exclude debt that was reduced through mortgage restructuring or if the mortgage debt was settled in a foreclosure.
- To qualify to be exempt from the amount of mortgage debt forgiveness being taxed as income, the debt must have been used to buy, build or improve your primary home.
- If you used any refinanced debt proceeds to pay off other debts, those amounts do not qualify to be excluded from being taxable income. They are not considered part of the mortgage debt forgiveness exclusions.
- If you do qualify as exempt, you can claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness and attach to your federal return the year the debt was forgiven or settled.
- Forgiven Debt on second homes, rental or business property, credit cards or car loans do not qualify for the exclusion.
- If the debt was reduced or canceled, you would typically receive a Form 1099-C, Cancellation of Debt from the lender of which the debt was settled or forgiven. By law, the form must show the amount of debt forgiven and the fair market value of the property foreclosed.
- Make sure Form 1099-C is correct. If the information is not correct, notify your lender immediately. Take particular notice of the debt forgive and fair market value amounts to make sure they are correct.
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