Canceled debt is normally taxable to you, but there are
exceptions. One of those exceptions is available to homeowners whose mortgage
debt is partly or entirely forgiven during tax years 2007 through 2012.
The IRS would like you to know these 10 facts 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.
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 www.irs.gov. IRS Publication 4681, Canceled Debts,
Foreclosures, Repossessions and Abandonments, is also an excellent resource.
You can also use the Interactive Tax Assistant available
on the IRS website to determine if your cancelled debt is taxable. The ITA
takes you through a series of questions and provides you with responses to tax
law questions.
Finally, you may obtain copies of IRS publications and forms
either by downloading them from www.irs.gov or by calling 800-TAX-FORM
(800-829-3676).
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