For every taxpayer who has had mortgage debt entirely or partially forgiven during any of the tax years 2007 to 2012, a special tax relief claim can be made that will exclude the forgiven debt from your income.
There are ten things that the IRS wants people to know about mortgage debt forgiveness:
1. Under normal circumstances, forgiven debt is taxable income. The mortgage debt forgiveness available excludes two million dollars of debt forgiven on your principal residence. This is a provision of the Mortgage Forgiveness Debt Relief Act of 2007.
2. You can only exclude one million dollars if you are married but filing separately.
3. The exclusion can be made from debt forgiven in a foreclosure, or in a mortgage modification.
4. The debt has to be secured by your principal residence, and has to have been taken out to buy, build or improve the residence.
5. Debt from refinancing qualifies if it was used to make substantial improvements to the principal residence.
6. If you used refinancing debt to pay off credit cards or other things that did not improve the principal residence, forgiveness of this debt does not qualify for the exclusion from income.
7. You claim the exclusion by using Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Attach it to your federal return for the appropriate tax year.
8. If the debt was forgiven on business property, second homes, rental property, car loans or credit cards, it does not qualify for the tax relief provision. Other tax relief provisions – such as insolvency – may be applicable. See Form 982 for details about these provisions.
9. If you have debt reduced or eliminated you should receive a 1099-C, Cancellation of Debt, from your lender.
10. Check the Form 1099-C carefully. Make sure the amounts listed are correct. Pay close attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
Orange County tax attorneys remind their clients that IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments has more information on debt forgiveness.
Source: irs.gov “Ten Facts for Mortgage Debt Forgiveness” 3/3/2011