Mortgage Forgiveness Relief Act | Andrew Robb RE/MAX Fine Properties Mortgage Forgiveness Relief Act | Andrew Robb RE/MAX Fine Properties

Mortgage Debt Forgiveness

If you are a homeowner whose mortgage debt is partly or entirely forgiven during tax years Jan 1 2007 through Dec 31 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income.

Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness:

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act, 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 short sale or 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, or business property do 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 and notify the lender immediately if any of the information 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 more information about the Mortgage Forgiveness Debt Relief Act visit the IRS website.

You can also use the Interactive Tax Assistant available on the IRS website to determine if the cancellation of debt is taxable. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions.

Andrew Robb - RE/MAX Fine Properties, 21020 N Pima Rd, Scottsdale AZ 85255