People who’ve lost their houses through foreclosure or who’ve restructured their mortgage loans might qualify for tax relief beneath the Mortgage Forgiveness Debt Relief Act.
Some mortgage debt won’t qualify for this exclusion and will be viewed taxable income. Mortgage loans that do not qualify contain home equity loans where the proceeds weren’t used to purchase, develop, or enhance the residence. Also, mortgages for 2nd homes and rental houses don’t qualify for the exemption. Nevertheless, some or all this debt may qualify for other exclusions.
The IRS describes the tax split this way: ‘The Mortgage Debt Relief Act of 2007 broadly speaking enables citizens to exclude income from the release of debt on the principal residence. Debt paid off through mortgage re-structuring, in addition to mortgage debt understood associated with a foreclosure, qualifies for the relief.
‘This provision pertains to debt understood in calendar years 2007 through 2013. As much as $2 million of understood debt is qualified for this exclusion ($1 million if married filing separately). The exemption doesn’t use if the discharge is a result of services done for the lender or any cause not directly associated with a decrease in the home’s price or the taxpayer’s financial condition.’ (Source: The Mortgage Forgiveness Debt Relief Act and Debt Termination, IRS.gov.)
Individuals who qualify for this tax relief will have to use Form 982 to record the debt.
Other Exclusions for Canceled Debts
Aside from the supply for mortgages on domiciles, the tax code offers other techniques such as debt relief could be tax-free. Canceled obligations don’t have to be contained in taxable revenue if the debt was canceled in a bankruptcy case, if the person is insolvent, or as something special if the debt was intended. Particular business or farm home could also qualify for tax-free treatment.
The bankruptcy exemption is specially appropriate, because it will probably affect debtors with home equity loans or mortgages on rental properties and second houses.
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