Tax on Cancelled Debt Tag

19 Mar Tax Fact 10-Mortgage Debt Forgiveness: Forms 1099-A and 1099-C

If your home is foreclosed, sold at a short sale, or if you give the home back to your lender in satisfaction of your debt, IRS Tax Fact 10 tells us to watch for a 1099-C or 1099-A statement in the mail during the next calendar year. Lenders are required to send the 1099 forms by the last day of February in the year following the tax year in which debt cancellation or forgiveness occurs. When you get the 1099-C, look at it carefully. If you think something is wrong on the notification, call the lender who issued the statement and see if you can get them to correct it. This is easier said than done but the IRS recommends that you take this course of action.
Read More

18 Mar Tax Fact 9-Make Sure Address Current With Mortgage Lender

Most home lenders, banks and government agencies are required to notify you and the IRS if they cancel all or a part of your debt. This is done by the issuance of Form 1099-C or, at times, Form 1099-A. By law, these forms must show the amount of debt forgiven and the fair market value of any property involved. For this reason, Tax Fact 9 points out that it is important that you make sure your home lender has your current address, even after foreclosure. If you have been foreclosed, it is likely you will have moved out of your home and have a new mailing address. The post office will forward your mail, if you ask them to do so, for six or twelve months depending on the type of request you make. However, the system is not perfect and you may not get the notice if it is sent to the wrong address.
Read More

17 Mar Tax Fact 8-Mortgage Debt Forgiveness for Property Not Principal Residence

As you know from the previous “Tax Facts”, when mortgage debt is forgiven, it can be excluded from income if it is qualified principle residence debt, and you know that a qualified principal residence must be the main home of the taxpayer. What happens to mortgage debt that is cancelled on a second home, rental property, or business property? Can this too be excluded from income under the Mortgage Debt Relief Act of 2007? IRS Tax Fact 8 makes it clear that the answer is no.
Read More

16 Mar Tax Fact 7-IRS Form 982 is Important

The IRS wants you to know, in Tax Fact 7, that you must use Form 982 in order to claim that forgiven mortgage debt should not be included in your income for tax purposes. IRS Form 982, entitled “Reduction of Tax Attributes Due to Discharge of Indebtedness” must be attached to your federal income tax return for the tax year in which the qualified debt was forgiven. Despite the lengthy and confusing form name, the form itself is only one page long. It comes with detailed instructions that have examples of how the form should be used. Form 982 can be found on the IRS website.
Read More

15 Mar Tax Fact 6-Cancelled Debt From a Refinance Can Be Taxable Income

In explaining tax on mortgage debt forgiveness, the IRS stresses, as tax fact number 6, that proceeds of refinance debt used for purposes, other than buying, building, or making a substantial improvement in the principle residence, do not qualify for exclusion from income if the debt is cancelled. This can be important. Many lenders require home owners to payoff outstanding credit card debt when they refinance their home. This made sense to the lender, in that it would be easier for the homeowner to make the required house payments if they did not have to pay other debt. However, money used to payoff credit card debts is not “qualified” for exclusion from income under the Mortgage Forgiveness Debt Relief Act of 2007.
Read More