It is a sad but true fact that many people are experiencing severe hardship now and some are unable to keep their homes. There is a new tax provision under the Mortgage Forgiveness Debt Relief Act of 2007 that offers tax relief in some of these instances.
Under normal tax law forgiveness of debt sometimes results in taxable income. This, of course, adds insult to injury for people who already have been dealing with cash flow problems. There is relief when the debt is forgiven by the lender and then when it’s time to file the next tax return its like a slap in the face when the taxpayer finds out that they have to pay taxes on the amount of debt that was forgiven as the IRS classifies the debt forgiven as income. Up to this time debt forgiveness on mortgage workouts or foreclosures was generally subject to taxation as income. Under the Mortgage Forgiveness Debt Relief Act of 2007 if your mortgage debt is partly or entirely forgiven during 2007, 2008, or 2009 you may be eligible to claim special tax relief and exclude it from taxation up to specific limitations based on your filing status, by filling out and filing Form 982 and attaching it to your federal return for that year.
There are some requirements to qualify for this special treatment. According to the IRS information available, “the debt that was forgiven must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence.” Also, “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 refinancing”. So what this means is that for this special debt forgiveness tax relief to apply the debt must have actually been related to your principal residence, and have been secured by the debt that was forgiven. At this time it appears that home equity loans that were used to consolidate other debts, or for other purchases or to acquire cash would not be eligible for this particular debt forgiveness.
If you have mortgage debt reduced or forgiven by a lender you should receive a year end statement from the lender. It is a Form 1099-C and it should list the amount of debt forgiven and the value of the home related to the mortgage debt forgiveness. Be sure you check the information on this form for accuracy and to retain it for filing your tax returns.
In these difficult times we must make every effort to stay informed regarding any and all economic and financial opportunities to save personal funds. After all most of us have heard that famous quote by Benjamin Franklin, “a penny saved is a penny earned”.
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