A surprisingly little known law signed by President Bush on December 20, 2007, might give tax relief to homeowners whose mortgage debt was partly or entirely forgiven during 2007, 2008 or 2009. “This act could greatly facilitate short sales for those homeowners who need to get out from under their mortgage prior to foreclosure, by not having to pay taxes on the difference between what is owed and how much the home sells for,” according to Jed Morris, Lukins & Annis, President and Banking attorney. “We have heard from a variety of sources that this information has not been as widely disseminated as it probably should be, so we decided to use our website as a way of getting the word out.”
Debt forgiveness normally results in income subject to income tax. Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. The required Form 982 and its instructions are available by clicking here.
Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on Form 982 (specifically, lines 1e, 2, and 10b).
The debt must have been used to buy, build, or substantially improve the taxpayer's 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.
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 kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.
Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.
The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home ( Box 7).
Click here for Form 982 and the instructions. Click here for the IRS Frequently Asked Questions on the Mortgage Forgiveness Act.
Lukins & Annis, P.S. // OFFICES IN: SPOKANE, COEUR D'ALENE, MOSES LAKE
Telephone: (509) 455-9555 or (208) 667-0517