Q: What is the Mortgage Forgiveness Debt Relief Act and when does it expire?
If you are a homeowner whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012 (i.e. due to foreclosure or short sale), you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are a few 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 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).
2. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a short sale or foreclosure. 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.
3. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
4. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
5. Proceeds of refinanced debt used for other purposes â€“ for example, to pay off credit card debt â€“ do not qualify for the exclusion.
6. Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions â€“ such as insolvency â€“ may be applicable. IRS Form 982 provides more details about these provisions.
7. The Mortgage Forgiveness Debt Relief Act is set to expire on December 31st, 2012. For those people considering short sale, the clock is ticking as homeowners who short sell or foreclose after this date may be subject to tenâ€™s of thousands of dollars in tax liability.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit http://www.irs.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. Please note that the Laura Kelley Realyu Group and its Associates are not CPAâ€™s or tax professionals and are not providing legal or tax advice.