Congress gave some struggling homeowners a gift last December. On December 20, congress enacted the Mortgage Forgiveness Debt Relief Act of 2007 allowing homeowners whose mortgage debt has been partially or fully forgiven to claim special federal income tax relief.
Normally, debt forgiveness generates taxable income. Under the Mortgage Forgiveness Debt Relief Act, however, debt forgiven in 2007, 2008 or 2009 may qualify for tax relief. The Emergency Economic Stabilization Act of 2008, also called the “bailout bill”, extends that relief through 2012, according to Boston.com, the online face of the Boston Globe.
Relief is available only for debt forgiveness granted on the taxpayer’s principal residence. Taxpayers may exclude mortgage debt forgiveness if the total principal balance of their loan was less than $2 million. The debt forgiveness limit for married persons filing separate returns is $1 million. In addition, the debt must have been used to buy, build or improve the residence as well as being secured by it. Refinancing debt less than or equal to the amount of the mortgage principal prior to refinancing is also eligible for relief.
Not all forgiven mortgage debt qualifies for relief un the Mortgage Forgiveness Debt Relief Act. Debt that does not qualify under the Act may still qualify for exclusion for income taxes under the insolvency exclusion, if the debt was discharged in a Title 11 bankruptcy, if the debt is qualified farm indebtedness or if it is qualified real property business indebtedness.
Taxpayers whose debt is forgiven during 2008 should recieve a year-end statement (Form 1099-C) from their lender after January 1, 2009. This form must show the amount of debt forgiven and fair market value of any property given up through foreclosure.
To claim relief for debt forgiven in connection with foreclosure or reduced through mortgage restructuring, taxpayers must complete the relevant portions of Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attaching it and Form 1099-C to their 2008 federal tax return. Taxpayers reorting forgiveness as a result of foreclosure on their principal residence need only complete lines 1e and 2 on Form 982. Taxpayers reporting forgiveness resulting from the modification of mortgage terms while retaining ownership of the residence need to complete lines 1e, 2 and 10b. More information about the Mortgage Forgiveness Debt Relief Act can be found on the Internal Revenue Service (IRS) web site at irs.gov and in the instructions on Form 982.
Remember, just because the federal government offers taxpayers mortgage forgiveness debt relief doesn’t mean individual states are. Taxpayers need to consult their tax preparer/advisor or state tax law to determine what, if any, relief is available at the state level.Click to See the Latest Mortgage Rates»