20 Aug Understanding the Mortgage Debt Relief Act
The Mortgage Debt Relief Act is something worth familiarizing yourself with in order to better understand your tax liability as it relates to forgiven debt. Right now, the program has been extended until December 31, 2012, but there is talk of extending it further to 2013. It’s a huge tax relief program for home owners who had part of their debt forgiven or canceled by a lender.
Under normal circumstances, when a borrower has forgiven or canceled debt, their lender will likely file Form 1099-C, which indicates a cancellation of debt and reports the amount to the IRS. The borrower is then required to include the canceled amount as income for tax purposes, which includes the amount of loan proceeds that they are no longer required to pay back to the lender.
But the Mortgage Debt Relief Act allows those taxpayers who underwent a mortgage restructuring, faced a foreclosure, or qualify for the relief to exclude income from the discharge of debt on their principal residence. The Debt Relief Act applies to debt forgiven from 2007 through 2012, and up to $2 million in debt is eligible for exclusion for married couples, or $1 million if married and filing separately. Also, if the total liabilities exceed the total assets and forgiven debt doesn’t qualify under this particular provision, it may qualify under the insolvency exclusion. The Debt Relief Act does not apply to losses on the sale or foreclosure of personal property.
The best course of action is to sit down with a financial or tax professional who can ensure you qualify for the Debt Relief Program because debt cancellation is not always taxable. These situations include indebtedness on a qualified principal residence, bankruptcy, insolvency, certain farm debts, and non-recourse loans. And even if there is forgiven debt that has been excluded from income, it still needs to be reported on Form 982 and attach to the borrower’s tax return. For an accurate accounting of how much debt was forgiven, the lender should provide a Form 1099-C and the amount will be listed in box 2.
For more information, please visit: http://www.irs.gov/individuals/article/0,,id=179414,00.html/