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.
By:
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.