MORTGAGE DEBT FORGIVENESS
by Barry L Weller, EA
If your mortgage debt is reduced or forgiven, you will receive a year end tax statement, form 1099-C, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed. 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. The limit is $1 million for a married person filing a separate return.
This act covered mortgage debt partly or entirely forgiven during tax years 2007 through 2009. The Emergency Economic Stabilization Act of 2008 extended the exclusion for an additional three years. Therefore, the exclusion now applies to debt discharged after 2006 and before 2013. Taxpayers may exclude debt reduced through mortgage restructuring as well as mortgage debt forgiven in a foreclosure.
To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion. However, proceeds of refinanced debt used for any purposes other than substantially improving your principal residence do not qualify. Some of the most common examples of mortgage debt forgiveness that do not qualify for the exclusion are when the refinanced debt was used to
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax relief provision. In some cases, however, other tax relief provisions of the Internal Revenue Code (insolvency for one example) may apply. For more information on these other provisions of the tax code, you can go to IRS.gov and download IRS publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.
Barry L Weller, EA is the president of Barry Weller & Associates with offices at 216 E Philadelphia Ave, Boyertown, PA 19512 Phone (610) 367-8280 He is an enrolled agent, licensed to represent taxpayers before the IRS.