Mortgage Forgiveness Debt Relief Act: The Foreclosure Crisis and Forgiven Debt – Relief at Last!
I’ve had a lot of clients worried about the foreclosure crisis lately. Clients who lost their homes are terrified of the tax repercussions of their once – expensive home selling for a pittance; then the mortgage lender turning around and issuing them a IRS Form 1099 for the forgiven debt. Imagine the horror-You’ve already lost your home to foreclosure- and now you have to pay thousands of dollars in taxes on the forgiven debt, too! The worst possible scenario!
This act only applied to debt that was obtained due to the purchase of a person principal residence or to improve the residence. The Mortgage Forgiveness Debt Relief Act of 2007 applies to the 2007 tax return along with the 2008 and the 2009 tax return. When people had to file 2007 taxes they still had to report the debt on their tax return. The form 982 has to be filed out and attached to the rest of your 2007 tax return.
The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income. The Act applies to cancelled debt used to buy, build or improve your principal residence. The Act applies to homeowners whose loan was less than $2 million. The Act does not apply to second homes, rental property, or other investment property. The Act applies to debt forgiven in 2007, 2008 or 2009. The cancelled debt listed on your Form 1099 still must be reported on your tax return, even though it will not be taxable. The amount of debt forgiven must be reported on Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness). This Form 982 must be filled out and attached to your tax return.
Form 982 is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the forgiven debt on a principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Your lender should send a Form 1099-C, Cancellation of Debt, by January 31, 2008. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.
While this doesn’t solve the problem of not having a home any longer, it is at least a good amount of help to make sure those who lost their homes have an easier time moving on as they will not have to pay taxes on that debt.
Learn more about Obama Mortgage Relief Plan Qualifications.
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