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Mortgage Debt Forgiveness

Published by the IRS
If your mortgage debt is partly or entirely forgiven during tax years 2007 – 2012, you may be able to claim special tax relief and exclude the debt forgiveness income.

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.

Taxpayers 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.

However, 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, you claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attaching it to your federal income tax return for the year.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other tax relief provisions, (for example, insolvency), may be available. See Form 982 for details.
If your debt is reduced or eliminated you will receive a year-end statement, Form 1099-C, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

The IRS urges borrowers to 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 (Box 2) and the value listed for your home (Box 7).

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. Taxpayers may obtain a copy of this publication and Form 982 either by downloading from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Form 982
Form 1099-C

Notice 2009-36 — Pursuant to the Home Affordable Mortgage Program, the U. S. Government may make certain payments to a real estate mortgage investment conduit (REMIC), one of the types of securitization vehicles that hold pooled mortgages. This notice states that if those payments are “contributions” subject to the 100 percent contribution tax set forth in the statutory rules governing REMICs, and if none of the exceptions set forth in those rules apply, then regulations will be issued that will provide an exception for such payments.
Revenue Procedure 2009-23 — On March 4, 2009, the United States Government released details about the Home Affordable Modification Program (HAMP), which will apply to mortgage loans held by real estate mortgage investment conduits (REMICs) and fixed investment trusts. This revenue procedure describes the conditions under which modifications to mortgage loans pursuant to the HAMP will not cause the IRS to challenge the tax status of REMICs or fixed investment trusts or to assert that those modifications to mortgages held by a REMIC give rise to a prohibited transaction.Notice 2009-36 and Revenue Procedure 2009-23 WILL BE IN IRB 2009-17, dated: April 27, 2009

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