By Sandy Flores
The law relief of cancellation of mortgage debt was decreed on December 20, 2007. This law is intended to help those homeowners who for financial reasons have been affected under this law allowing the exclusion of income realized as a result of the modification of the terms / conditions of the mortgage, or foreclosure on their primary residence.
Normally, debt that is forgiven or a lender has for all purposes be included as income on your tax return and is taxable or taxable canceled. This relief act cancellation of mortgage debt 2007 does is allow you to exclude the income on the canceled debt on your principal residence.
If your mortgage debt is partly or entirely forgiven at any time during 2007 through 2012, you may qualify to claim special tax relief on your federal tax return for that year. The relief act cancellation of mortgage debt of 2007 applies to debt cancellation, 2007, 2008 or 2009. The law emergency economic stabilization in 2008 and the deal extends through 2012.
What the Internal Revenue Service (IRS for its acronym in English) wants you to know about forgiveness of mortgage debt is:
– Normally forgiven debt results in taxable income. However, under the Act of Mortgage Forgiveness Debt Relief 2007 you could exclude from tax up to two million of debt forgiven on your principal residence. The limit is one million for a married person filing a separate return.
– The reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this debt relief.
– The debt must have been used to buy, build or significantly improve your principal residence and must have been defined by that residence. Debt used to refinance qualifying debt also qualify for the exclusion, but only up to the amount of the old mortgage premium, just before the refinancing.
– 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 types of tax relief – based, for example, in insolvency – could be available.
– If your debt is reduced or eliminated you should receive a 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 delivered through foreclosure.
– Taxpayers who qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes
The amount of debt cancellation have to file Form 982. The Form 982 must be included in your tax return.
Form 982, “Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)” (Reducing the attributes of tax due to debt relief (and 1082 adjusted basis section), is used for other purposes in addition to reporting the exclusion of debt cancellation on qualified principal residence. If you are using the form only to report the cancellation of debt of qualified principal residence as a result of foreclosure on your principal residence, just fill in the 1e and 2 lines. If you keep the title to the property from his residence and modifying the terms of your mortgage resulted in the cancellation of the debt of qualified principal residence, complete 1e, 2 line and 10b. Attach the Form 982 to your tax return.
For more information about the Act Mortgage Forgiveness Debt Relief 2007, visit the IRS Web site at IRS.gov. A good source of information is in Spanish Publication 4705 (SP) IRS “tax relief for home owners who are struggling financially.” Both this, and Publication 4681 “Cancelled debts, foreclosures, repossessions and abandonments “(in English) and Form 982 can be downloaded from IRS.gov or ordered by calling 800-829-3676.