Mortgage Debt Forgiveness
Losing a home is a stressful experience. Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, it might not be a taxable experience.
This act was created to cover the years 2007 through 2012 and excludes up to $2 million of debt forgiven or cancelled by a mortgage lender on your principal residence. The limit is $1 million for a married person filing a separate return.
When a lender cancels or forgives a debt that is usually considered to be a taxable event. Individuals who lost their homes through foreclosure or have debt that was reduced through mortgage restructuring will not have to pay income tax on the amount of mortgage debt that was forgiven or cancelled.
To qualify, the debt must have been used to buy, build or substantially improve your principal residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualifies for the exclusion. Debt forgiven on second homes, rental properties, business property, credit cards or car loans do not qualify for the tax relief provision.
When debt is forgiven or reduced, the lender will issue a 1099-C, Cancellation of Debt form, to you at the end of the year. The IRS asks that you examine this form carefully and pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.