Under normal circumstances, when your home mortgage debt is either all or in part cancelled you will be taxed on that amount.
However, The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven from 2007 to 2014. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
This exclusion law originally expired at the end of 2013. The Tax Increase Prevention Act extended the law until the end of 2014. The IRS has issued tax information on this special exclusion:
- Main Home. If the cancelled debt was a loan on your main home, you may be able to exclude the cancelled amount from your income. You must have used the loan to buy, build or substantially improve your main home to qualify. Your main home must also secure the mortgage.
- Loan Modification. If your lender cancelled part of your mortgage through a loan modification or ‘workout,’ you may be able to exclude that amount from your income. You may also be able to exclude debt discharged as part of the Home Affordable Modification Program (HAMP). The exclusion may also apply to the amount of debt cancelled in a foreclosure.
- Refinanced Mortgage. The exclusion may apply to amounts cancelled on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. Amounts used for other purposes don’t qualify.
- Other Cancelled Debt. Other types of cancelled debt such as second homes, rental and business property, credit card debt or car loans do not qualify for this special exclusion. On the other hand, there are other rules that may allow those types of cancelled debts to be nontaxable.
If your lender reduced or cancelled at least $600 of your debt, you should have received Form 1099-C (Cancellation of Debt, in January of the next year. If you qualify, report the excluded debt on Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness).
For more information, help with your foreclosure deficiency, the Mortgage Forgiveness Debt Relief Act or Debt Cancellation, or for any other tax issue, call our Denver tax attorney for the best possible outcome, at 303 618-2122. To ensure the best possible advice, our tax attorney, located in Denver, is well-versed in tax, foreclosure and business issues, for a holistic approach to your case.
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