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.
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
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, 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. 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. Notify the lender immediately if any of the information shown 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 of 2007,
visit IRS.gov. A good resource is IRS Publication 4681, Canceled Debts,
Foreclosures, Repossessions and Abandonments. Taxpayers may obtain a copy of
this publication and Form 982 either by downloading them from IRS.gov or by
calling 800-TAX-FORM (800-829-3676).
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