The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
Housing-Market / US Housing Jan 04, 2013 - 02:08 AM GMTBy: Submissions
The Mortgage Debt Relief Act of 2007 is a temporary law that allows homeowners who have their mortgage debt reduced, either through restructuring, modification, short sale or foreclosure, not claim the forgiven debt amount as taxable income.
This law only applies to the calendar years of 2007 through 2012. The maximum amount allowed to be claimed under this Act is $2 million when filing jointly, or $1 million if filling separately. This tax relief is not available if the debt was forgiven in exchange for any services performed for the servicing company or the lender. This tax relief only applies if the debt relief was given due to the declining value of the home or financial situation of the taxpayer.
Commonly Asked Questions About The Mortgage Debt Relief Act of 2007
What Exactly Is Debt Cancellation or Mortgage Debt Relief?
When you take out a loan, you do so under the pretenses that you are going to repay that debt. Because the money is repaid, it is not considered income. However, when the debt is forgiven by the lender due to a loan modification, principal reduction, short sale or foreclosure, that initial money that was borrowed is no longer being repaid. Since it is no longer being repaid, the IRS considers this money as taxable income.
The lender will issue you a 1099-C (Cancellation of Debt) form at the end of the calendar year if you are required to claim the forgiven debt on your tax forms as income.
Are All Cancellation Of Debt Events Taxable?
No. There are specific situations where the cancellation of a debt does not entail having to claim the forgiven amount as income. These include:
• Any mortgage debt relief on the primary residence of an individual between the years 2007 and 2012.
• Any debts that are forgiven during bankruptcy.
• If you are deemed insolvent. To be seen as insolvent, your debts must exceed your assets at fair market value.
• Some debts that is associated with family farms.
• Collateralized loans. Also known as non-recourse loans, these are loans that default and the lender repossess the financed items.
Does This Apply To Mortgage Relief On My Second Home?
No. The debt relief given to the taxpayer only applies to their primary residence.
Does This Relief Apply To Any Other Debts?
No. The debt relief act does not apply to personal loans, credit card debt, auto loans, or any other type of financial lending instrument. This Act only applies to the mortgage of the primary residence of the home owner.
If My Debt Qualifies, Do I Still Have To List The Amount On My Taxes?
Yes. If you qualify under the Act to not claim the forgiven debt as income, you will still have to prepare IRS Form 982 and attach it to your tax forms for the year. It is very important that you read the instructions carefully when completing this form. Home owners that remain in the home must complete different parts of the form than those who lost their homes to foreclosure.
Author's Bio:
Brent Dev is a 23 years old finance writer. He mostly spends his time writing blog posts and editorials with a focus on housing, mortgage loans and economy for Save on Money. You could reach him at brent@saveonmoney.org.
© 2013 Copyright Brent Dev - All Rights Reserved
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