If you have any form of debt cancelled, you are liable for tax on the amount forgiven. “But with mortgage debt, it’s different,” says Darrin Mish, a tax attorney based in Tampa, Florida. If your mortgage debt was forgiven from the tax years 2007 to 2012, you will not be taxable. This applies to even partially forgiven mortgage debt.
The IRS is out to help you save money on your taxes (believe it or not) by revealing these facts about mortgage debt forgiveness:
Under the Mortgage Forgiveness Debt Relief Act 2007, you are eligible for up to $2 million in mortgage debt forgiveness on your principal residence for which you do not have to pay taxes. But if you are married and filing separately, the limit is only $1 million. However, the debt must be for the purpose of buying, building or substantially renovating your principal residence. Furthermore, the property concerned must be the security for the mortgage.
If you have refinanced your property and the proceeds have been used to make substantial renovations to your principal residence, this amount also may be excluded from tax if forgiven. On the other hand, if you have used your refinancing proceeds to pay off other debts such as credit card debts, then the amount no longer becomes eligible to be excluded and will therefore be taxed.
If you have reduced your mortgage through restructuring your loan or if your mortgage has been forgiven because your property has been foreclosed, you can also exclude it from taxes.
All these are applicable only to mortgages on your principal (primary) place of residence. If you have debt forgiven on your second home, business premise or other forms of debt such as car loans or credit card debt, these are not eligible to be excluded from being taxed. But in certain situations, other tax relief provisions like insolvency may be applicable here. Look up IRS Form 982 for more details about these provisions.
If you have any such debt forgiven, you would Form 1099-C, Cancellation of Debt, from your lender at the end of the year. This form will show how much loan debt you have been forgiven and the fair market value of any property foreclosed. Once you receive your Form 1099-C, you should check that all figures therein are accurate, especially the amount forgiven and the current market value of your property.
To claim this special exclusion you need to fill out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness and submit it with your federal income tax return for the tax year in which the debt was forgiven.
“Taxpayers who feel they qualify for this tax exclusion and wish to take advantage of their rights to Mortgage Debt Forgiveness under the Mortgage Forgiveness Debt Relief Act of 2007 should contact us,” said Darrin Mish.
Mr. Mish can be contacted at (813) 229 7100.