Under normal circumstances, debt forgiveness results in taxable income. Not a fun position to be in if you're the original debtor. However, in December 2007, Congress passed the Mortgage Forgiveness Debt Relief Act in an effort to provide tax relief for struggling homeowners by temporarily lifting this rule for debts forgiven on primary residences. More recently, in October 2008, Congress extended the relief to include debt forgiven in calendar years 2007 through 2012 as well. So, if you have restructured your home loan and reduced the amount owed, or had debt forgiven as part of a foreclosure during this time, it's important to remember that you may no longer owe taxes on that amount.
As always, there are some specific IRS regulations that must be met in order to qualify. They key items are as follows:
- Debt forgiveness must have occurred from 2007-2012
- The relief only applies to debt used to buy, build, or improve your personal residence
- Cap is $2 million, of $1 million for married people filing separately
- Debt reduced through loan modifications, as well as debt forgiven in connection with a foreclosure, short sale, or a deed in lieu of foreclosure, may qualify for this relief
You should have received a form 1099-C from your lender by the end of January, which indicates the exact amount of forgiven debt and the estimated fair market value for any property given up through the foreclosure process. Be sure to carefully review this form before filing your tax returns this year. Lenders are processing a lot more paper right now than normal, so mistakes are bound to happen.
Comments
That's great news. It would be pretty scary to get an $80,000 1099-C in the mail because you negotiated a short sale with your lender. This forgiveness makes a lot of sense.
Thanks for your comment Brett. I agree, any letter from the IRS is scary, but a 1099-C for $100K would really hurt.