Homeowners whose mortgage debt is forgiven either partly or entirely during the 2007 – 2012 tax years may benefit from the IRS’ Mortgage Forgiveness Debt Relief Act of 2007. According to this debt relief act, homeowners may be in a better situation than expected, despite their current financial situation.
“Normally, debt forgiveness results in taxable income,” the IRS website states (IRS Tax Tip 2011-44, March 3, 2011). “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.”
A married person filing separately faces a limit of $1 million. Excusable debt includes that which has been reduced due to mortgage restructuring or debt forgiven through foreclosure. Qualified debt must be related to buying, building, or dramatically improving the primary residence, even through refinanced debt proceeds used for home improvement. Debt for second homes, rental properties, business properties, credit cards, and car loans is not qualified under this tax relief act.
Qualifying homeowners can claim the special exclusion with Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness and then attach it to the federal income tax return for that tax year (when the debt was forgiven).
To learn more about the Mortgage Forgiveness Debt Relief Act of 2007, check out www.irs.gov.