Tax Fact 3-Debt Cancelled through Mortgage Restructuring is Eligible

12 Mar Tax Fact 3-Debt Cancelled through Mortgage Restructuring is Eligible

The IRS, in listing ten important facts about mortgage debt forgiveness, points out that debt on a principal residence that is cancelled by restructuring the loan in cooperation with the lender can exclude it from taxable income. Subject to the two million dollar limit on the Mortgage Forgiveness Debt Relief Act of 2007, a write down of the balance due to a lender, which can cause cancellation of debt, may qualify for exclusion of that debt cancellation from income.

With the government sponsored Home Affordable Modification Program (HAMP), modifications are beginning to pick up speed which means mortgage restructuring may become a more common occurrence. Some lenders have established their own programs for modifying home loans. Whether or not a government program is involved, any write down of the qualified principle resident’s debt can qualify for exclusion from income.

It is important to realize that debt cancellation occurs when a lender forgives a portion of its debt. The failure to take this into consideration could result in a letter from the Internal Revenue Service demanding the payment of more tax. Find out what to do if you get that type of letter in my article on responding to the IRS notice that you owed tax from debt cancellation income.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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