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IRS Tax Tip 2013-31: Important Facts about Mortgage Debt Forgiveness

March 12, 2013 7:12 am / Leave a comment

If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.

Here are 10 key facts from the IRS about mortgage debt forgiveness:

1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.

2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.

3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.

4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.

5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.

6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify.

7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.

8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.

9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.

10. Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.

Use the Interactive Tax Assistant tool on IRS.gov to check if your cancelled debt is taxable. Also, see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. IRS forms and publications are available online at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:

Interactive Tax Assistant tool
Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments
Mortgage Forgiveness Debt Relief Act and Debt Cancellation
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness
IRS YouTube Videos:

Mortgage Debt Forgiveness – English | Spanish | ASL

Has Your Mortgage Debt Been Forgiven? Here Are Some Things You Should Know

August 1, 2009 3:58 am / 2 Comments on Has Your Mortgage Debt Been Forgiven? Here Are Some Things You Should Know

[Stacie says: Here are some helpful tips that are part of the Internal Revenue Service’s Summer Tax Tips series. Definitely worth the read. For more information see also my blog Canceled Debts, Foreclosures, Repossessions, and Abandonments]

There is tax relief for struggling homeowners. If your mortgage debt is partly or entirely forgiven at any time during 2007 through 2012, you may be able to claim special tax relief on your federal income tax return for that year.

Here are six things the IRS wants you to know about mortgage debt forgiveness.

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.

2. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.

3. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

4. 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, other kinds of tax relief – based on insolvency, for example – may be available.

[Stacie says: The following worksheet can be used to calculate the extent that you were insolvent.]
[Click on the picture to enlarge]

5. If your debt is reduced or eliminated you should receive a 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 given up through foreclosure.

6. Taxpayers who qualify claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attaching it to their federal income tax return for the year.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS Web site at IRS.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. This publication and Form 982 can be downloaded from IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).

Links:
IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments (PDF)
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (PDF)

Canceled Debts, Foreclosures, Repossessions, and Abandonments

April 27, 2009 8:37 pm / Leave a comment

A summary of Publication 4681
By Stacie Clifford Kitts, CPA
Generally
Generally, if you have a debt (that is a debt that you are personally liable for) that is cancelled or forgiven, you must include the amount of cancelled debt as ordinary income on your income tax return. However, there are exceptions to this rule. Here is a list of some of the exceptions which would allow you to exclude the cancelled debt from income:
1) If the cancellation is intended to be a gift, then you are not required to report it as income. See Publication 525 for more information.
2) Certain student loans, if they contain a provision that the debt can be cancelled if certain qualifications are met.
3) If payments on the debt would have been considered tax deductions at the time the principal payments were made.
4) If the price of an item you have purchased on credit is reduced by the seller at a time when you are insolvent. However, you must reduce your basis in the property by the amount of the reduction.
There are also certain situation which allow you to exclude debt cancelation from income.
Bankruptcy
If you are bankrupt and you file for bankruptcy under title 11, the debt that is cancelled is not included in your income. But only if the cancellation of debt is under the jurisdiction of a court and the court approves the cancelation.
If your debt is cancelled, you should complete and attach Form 982 to your federal income tax return.

Insolvency

You are not required to include debt cancellation to the extent that you are insolvent immediately before the cancellation. You are insolvent if the total of your liabilities, exceeds the FMV of all of your assets.
To show that you are insolvent and to exclude cancelled debt, attach Form 982 to your income tax return.
The following worksheet can be used to calculate the extent that you were insolvent.
[Click on the picture to enlarge]
Certain qualified farm indebtedness can be excluded from income – See publication 4681
Qualified Real Property Business Indebtedness

If you have qualified real property business indebtedness that is cancelled, you can elect to exclude this from income. However, the debt must meet the following criteria:

1) It must be incurred or assumed in connection with real property used in a trade or business.

2) It must be secured by such real property.

3) It must be incurred or assumed at either of the following times:

a. Before 1993

b. After 1992, if the debt is either (i) qualified acquisition indebtedness (defined below), or (ii) debt incurred to refinance qualified real property business debt incurred or assumed before 1993 ( but only to the extend the amount of such debt does not exceed the amount of debt being refinanced.)

4) It must be debt to which you elect to apply these rules

Qualified principal Residence indebtedness

The qualified debt from your principal residence can be excluded from income if it is cancelled. The maximum amount that can be excluded is $2 million ($1 million if you are married filing separately).
Be sure to check out Publication 4681 for a definition of qualified principal residence indebtedness.
Attach a completed Form 982 to your federal income tax return to exclude the income.
Qualified Midwestern Disaster Area Indebtedness
If non business debt is cancelled by an applicable entity and you are a qualified individual you can exclude the cancelation from income. See publication 4681 for more details.

What’s new for 2008

The qualified principle residence indebtedness exclusion has been extended. The extension includes debts discharged after 2006 and before 2013.

The Heartland Disaster Tax Act Relief of 2008 which allows qualified individual to exclude from gross income discharges of certain indebtedness because of Midwestern Disasters.
The American Recovery and Reinvestment Act of 2009 allows certain businesses to make an elect to defer over a five year period the recognition of income from the cancellation of business debt arising from the reacquisition of certain types of business debt repurchased in 2009 or 2010. However, for the current or subsequent years, if you make the election to defer over the five year period, you cannot exclude the cancellation of debt related to a title 11 bankruptcy case, insolvency, qualified farm indebtedness or qualified real property business indebtedness. See Section 108(i) for more information.