You probably recall the Mortgage Debt Relief Act of 2007 allows certain taxpayers to exclude income connected with the discharge of debt on a primary residence. This includes debt that has been reduced through the restructuring of a mortgage as well as mortgage debt forgiven in connection with foreclosure, short sale, or deed-in-lieu of foreclosure.
The recent extension comes as part of the vote that passed so we do not go over the “fiscal cliff.” This vote should motivate potential short sale sellers to list and sell their homes in 2013.
According to the IRS (Tax Tip 2011-44), here are 10 facts that the IRS wants people to know about Mortgage Debt Forgiveness. (Information courtesy of the IRS. Please check with your tax advisor/CPA regarding your specific situation.)
- Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
- The limit is $1 million for a married person filing a separate return.
- You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
- To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
- Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
- Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
- If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your 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. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
- If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
- Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
“The state Senate today passed C.A.R.’s tax relief bill without a single “no” vote. SB 30, which provides tax relief to those who are selling a home in a short sale, will now be considered in the state Assembly.
In late May, the Senate Appropriations Committee linked SB 30 to SB 391, a C.A.R.-opposed bill that creates a recording tax. This link, in the form of an amendment, says that SB 30 cannot take effect unless SB 391 does as well. While we are troubled by this transparent political maneuver meant to force C.A.R. to support the recording tax, C.A.R. will continue to work toward the passage of SB 30 in the Assembly, the defeat of the recording tax, and the delinking of the two bills.”
Again, check with your tax advisor/CPA for details regarding your specific situation.
Source: Short Sale Expeditor and IRS
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