TaxBizPro, LLC posted on March 11, 2010 11:12
This material was prepared by TaxBizPro, LLC ©: 2010
If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim a special tax relief and exclude the debt forgiven from your income. Here are some facts on this.
· Generally, if debt is forgiven, it results in a taxable income to you. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of forgiven debt on your principal residence. For married person filing a separate return, the limit is $1 million.
· If your mortgage debt was forgiven or reduced due to the mortgage restructuring, foreclosure or short sale, you also may exclude it from your income.
· To qualify, the forgiven debt must have been used to buy and/or refinanced in order to: build or substantially improve your principal residence and be secured by that residence.
· Proceeds of refinanced debt used for other purposes such as to pay off credit cards, do not qualify for the exclusion.
· If you qualify, claim the special exclusion by filing Form 982*, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
· 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. See instructions for Form 982*.
· When your debt is reduced or eliminated, you will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. This form will show the amount of debt forgiven and the fair market value of any property foreclosed.
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