17 Mar Tax Fact 8-Mortgage Debt Forgiveness for Property Not Principal Residence
As you know from the previous â€œTax Factsâ€, 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.
When debt is forgiven on a second home, rental property, business property or for debts such as credit cards or car loans, the Mortgage Forgiveness Debt Relief Act of 2007 does not apply. The exclusion for insolvency, qualified business property, or even bankruptcy may apply. However, timing is important. The instructions for IRS Form 982 explain how to use these and other exceptions to the tax on cancelled debt. However, a trip to a CPA, Enrolled Agent or other tax professional may be wise in these circumstances.
Most taxpayers do not even know that debt cancellation can result in taxable income. The tax code can be complicated and filled with exceptions to the rules it states. If you have cancelled debt in the tax year, be careful with your tax return or you may get a letter from the IRS claiming you owe more tax than was calculated on the return.
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