| 1.
Generally, debt forgiveness results in taxable income. Even
so, under the Mortgage Forgiveness Debt Relief Act of 2007,
you could be able to exclude up to $2 million of debt forgiven
on your primary residence. |
| |
| 2.
The limitation is $1 million for a married person filing an
individual return. |
| |
| 3.
You may omit debt reduced through mortgage refinancing, in
addition to mortgage debt forgiven in a foreclosure. |
| |
| 4. To
qualify, the debt must have been used to purchase, build or
considerably improve your principal residence and be secured
by that residence. |
| |
| 5. Refinanced
debt funds used for the purpose of considerably improving
your primary residence also qualify for the exclusion. |
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| 6.
Proceeds of refinanced debt used for other purposes - for
example, to pay off credit card debt - do not qualify for
the exclusion. |
| |
| 7. 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. |
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| 8.
Debt forgiven on 2nd homes, rental properties, business properties,
credit cards or automobile loans do not qualify for the tax
relief provision. In some cases, however, other tax relief
provisions - such as insolvency - can be applicable. IRS Form
982 provides more details about these provisions. |
| |
| 9. 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.
|
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| 10. 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. |
Individual
Tax Return Service
Individual
Tax Return Service
