Ten Facts about Mortgage Debt Forgiveness
If your mortgage debt is partially or completely forgiven for the years 2007 through 2012, you could be able to claim special tax relief and exclude the debt forgiven from your income. Here is a list of 10 facts the Internal Revenue Service desires you to know about Mortgage Debt Forgiveness.
- 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.
- The limitation is $1 million for a married person filing an individual return.
- You may omit debt reduced through mortgage refinancing, in addition to mortgage debt forgiven in a foreclosure.
- To qualify, the debt must have been used to purchase, build or considerably improve your principal residence and be secured by that residence.
- Refinanced debt funds used for the purpose of considerably improving your primary residence also qualify for the exclusion.
- Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – 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 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.
- 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.
For Your Reference, the above mentioned IRS Forms:
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