The good news is Congress passed a bill that kicks the can down the field a bit….so if you sell your home in short sale, or if you get a principal reduction…..on your homestead….you may not ow taxes…..

BUT IF IT’S NOT YOUR HOMESTEAD….WATCH OUT…..

From the IRS website:

What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing
separately.

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

3 Response Comments

  • VERA HOLTHAUS  January 6, 2013 at 2:23 pm

    I WAS FORECLOSED ON AND PROPERTY SOLD. I’M STILL IN IT AND NEED A GOOD ATTORNEY TO HELP ME KEEP MY HOUSE. I’VE HAD FOUR SO FAR, THE LAST ONE LIED AND THE FIRST ONE WAS DISBARRED AND KILLED. ANY ONE TO WORK IN LEE COUNTY OR WILLING TO WORK IN LEE COUNTY. I NEVER WAS ALLOWED ONE WORD ON MY OWN BEHALF IN COURT EVER AND NEVER GOT THE ORDEREED MEDIATION. I FILLED FOR STOP SELL AND TOLD IT WOULDN’T HAPPEN BUT DID IT LAST YEAR WHEN JUDGE WAS OUT ON DEC. 28. THE BANK BOUGHT FOR $100. I BLOCKED TITLE TILL THEY SOLD TO A CORPORTATION WITH THE FAKE SIGNATURES AGAIN FOR $111,000. I BOUGHT FOR $345 AND TOOK A SECOND FOR $180,000. I PUT 20% DOWN AND PUT OVER $300,000 IN REMODEL. WHY WERE THEY CHARGING ME OVER THREE TIMES THE AMOUNT AND I BUILT IT OVER WHEN I FIRST BOUGHT AND THEN SUFFERED MAJOR LOSS AFTER CHARLIE THAT SAME YEAR AND JUST GOT IT REPAIRED AND WILMA CAME. I COULDN’T WORK SO I DID THE CONSTUCTION, ETC. I WAS WITHOUT INSURANCE MONEY FOR 4 YEARS AND WORK PLUS A LOT MORE.

    Reply
  • Mario A  February 24, 2013 at 3:00 pm

    Does anyone know if the debt forgiveness law has been extended in 2013. Can’t find any current information.

    Reply
    • Sue Slusher  September 28, 2013 at 11:09 am

      If I do a deed in leu on my personal residence and it does not go thru until January of 2014. do I still qualify for the IR-2008-17 tax relief

      Reply

Leave A Comment

Please enter your name. Please enter an valid email address. Please enter a message.