MORTGAGE DEFAULT RESCUE OR PERSECUTION
LEARN ABOUT THE MORTGAGE FORGIVENESS DEBT RELIEF ACT
If you are in foreclosure or have a mounting mortgage default you need to be aware of a law that can save you or penalize you. 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.
1. The limit is $1 million for a married person filing a separate return.
2. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
3. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
4. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
5. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
6. 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.
7. 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.
8. 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.
9. 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.
10. A certified public accountant is qualified to help you interpret the form, assess the implications of it on your overall tax liability, and prepare your tax return. A local tax return preparer is not qualified to deal with this issue. Visit the experts.
It is important to note that The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debts forgiven in connection with a foreclosure qualify for this relief.
While these ten points may bring about a sigh of alleluia for many taxpayers in mortgage default, it’s important to note that the exclusion of cancelled debt from income does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition and it doesn’t cover investment properties.
If a mortgagor doesn’t expect to get a 1099 C from its lender for default on the primary residence for mortgage debt forgiven in 2012, in 2013 this mortgage debt forgiveness relief will not be available.
Individuals in this situation may want to consider filing for Bankruptcy in order to escape taxation.
Jennifer A. Blanc
Attorney at Law
Jennifer A. Blanc is a qualified Chicago Bankruptcy Attorney, located in Westchester, IL and helps consumers file bankruptcy to avoid tax liabilities. She is a go to professional for helping people solve their financial problems. Visit Jennifer A. Blanc at www.jenniferlawone.com or call 708-848-LAW1.