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Mortgage Debt Forgiveness for Tax Years 2007 through 2012 (Tax News On The Tenth)
By Timothy M. Hughes 2010-03-10
If your client’s mortgage debt has been partly or entirely forgiven during tax years 2007 through 2012, they may be able to claim special tax relief and exclude the debt forgiven from their income. The IRS has outlined key facts that preparers and their clients should be aware of with respect to Mortgage Debt Forgiveness.
- Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer may be able to exclude up to $2 million of debt forgiven on the taxpayer’s principal residence.
- The limit is $1 million for a married person filing a separate return.
- The taxpayer may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
- For the taxpayer to qualify, the debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and be secured by that residence.
- Refinanced debt proceeds used for the purpose of substantially improving the taxpayer’s principal residence also qualify for the exclusion.
- Proceeds of refinanced debt not used for substantially improving the taxpayer’s principal residence such as for paying off credit card debt, do not qualify for the exclusion.
- For the qualifying taxpayer to claim the special exclusion the taxpayer must fill out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to their federal income tax return for the tax year in which the qualified debt was forgiven.
- Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. However, other tax relief provisions such as insolvency may be applicable to allow the taxpayer relief. The insolvency relief is also sought through using IRS Form 982.
Please keep in mind that this is only a summary of the Mortgage Forgiveness Debt Relief Act of 2007. If you would like more details about this relief, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS collection problems please call our office and ask for Brittany at (847) 705-7555 to talk to one of our tax attorneys and find out how we can help your client in front of IRS collections.
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