Home Listings

Time is running out to take advantage of the Mortgage Forgiveness Relief Act.

When you owe a debt, and the obligation to repay that debt has either been cancelled or forgiven, you may owe standard income tax on that debt amount. In most cases, the Internal Revenue Service (IRS) considers this kind of cancelled or forgiven debt as imputed ordinary income. However, there are several exceptions – one of them created by the Mortgage Forgiveness Debt Relief Act (the Act). In late 2007, Congress passed the Act, which details circumstances under which no income tax liabilities may be due for debt relief on your primary dwelling.

How it works

This Act states that debt cancelled or forgiven on your primary dwelling may not be taxed. However, this statute is time-sensitive and is only active from January 1, 2007, through January 1, 2014. When debt repayment is cancelled, the lender in most cases is required to report that amount to the borrower and the IRS – with the borrower receiving a Form 1099-C (cancellation of debt). As soon as you recognize that you may need to sell or foreclose, get your paperwork in order well before December 31, 2013.

Mortgage debt forgiveness: 10 key points from the IRS

  1. 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.
  2. The limit is $1 million for a married person filing a separate return.
  3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
  4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
  5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
  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.
  8. 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 – such as insolvency – may 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.
  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.

Go to irs.gov/newsroom/article/0,,id=254930,00.html for more information about the Mortgage Forgiveness Debt Relief Act of 2007. You’ll also find additional links for downloadable IRS publications and forms.

If you are facing a foreclosure, or considering a short sale, give me a call!