What Is the Mortgage Foreclosure Forgiveness Act?
The Mortgage Foreclosure Forgiveness Act is a way to give homeowners a break from paying income tax on the amount of a discharged mortgage, but only for a limited time. Debt forgiveness most often results in taxable income, but homeowners can attach a completed Form 982 to their federal income tax return to claim this tax relief.
Definition
The Mortgage Forgiveness Debt Relief Act of 2007, sometimes called the Mortgage Foreclosure Forgiveness Act, allows taxpayers to exclude income from debt discharged in connection with a foreclosure or mortgage restructuring. The Act applies to a taxpayer's primary residence only.
Timeline
The Mortgage Foreclosure Forgiveness Act applies to debt discharged, or forgiven, in the calendar years 2007 through 2012. Lenders must send a year-end statement (Form 1099-C) to borrowers whose debt was eliminated or partially forgiven. Lenders have until January 31 of the year immediately following the year in which the debt forgiveness took place to send the form.
Amount
Taxpayers may exclude up to $2 million of forgiven debt relating to a foreclosure or mortgage restructuring in accordance with the Mortgage Foreclosure Forgiveness Act. Married taxpayers filing separately may exclude up to $1 million each. The exclusion amount is not applicable if the forgiven debt is related to services performed for the lender or any reason not directly related to the decline in the value of the home or to the taxpayer's financial situation.
Debt Cancellation
Debt cancellation, discharge and forgiveness are terms that mean you no longer have to pay an outstanding amount owing on a loan. In certain circumstanced you may need to file the amount of the forgiven debt as income on a tax return. Debts that are discharged through bankruptcy are not considered taxable income, but forgiven debts due to foreclosure or restricting can be considered taxable income.
Conditions
The forgiven debt must have been used to build, buy or substantially improve the taxpayer's primary residence. The forgiven debt must have been secured by the primary residence. Debt resulting from refinancing the qualifying debt is also eligible under the Mortgage Foreclosure Forgiveness Act, but only in an amount up to the old mortgage principle immediately prior to refinancing. The amount of forgiven debt reduces the taxpayer's cost basis in the home.
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