09 Mar Ten Tax Facts About Mortgage Forgiveness
Home foreclosure numbers are growing despite (inadequate) government efforts to stem the tide. Due to falling prices and a floundering economy more homes are likely to be lost in the future. The Mortgage Forgiveness Debt Relief Act of 2007 provides some relief from possible tax liability associated with foreclosure. With this in mind, the IRS has published a list of ten facts it wants taxpayers to know about debt cancellation associated with Mortgage Foregiveness. In the words of the IRS, direct from their website:
- Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
- The limit is $1 million for a married person filing a separate return.
- You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
- To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
- Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
- Proceeds of refinanced debt used for other purposes â€“ for example, to pay off credit card debt â€“ do not qualify for the exclusion.
- If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
- Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions â€“ such as insolvency â€“ may be applicable. IRS Form 982 provides more details about these provisions.
- If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
- Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
Over the next two weeks, I plan to elaborate on each of the above ten facts. A tax bill can be an unexpected consequence to the devestation wrought from home foreclosure. With the information on this website, and the help of one of my co-authors, you may be able to avoid home foreclosure altogether. However, if your home loan is foreclosed, it is best to know and understand the above facts so that you can avoid tax liability when it is possible to do so.
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