Time is Running Out on Mortgage Forgiveness Debt Relief As we head into fall and the clock begins to wind down on the major league baseball season, another clock is winding down on an important provision for the real estate industry. Unless Congress acts to extend the Mortgage Forgiveness Debt Relief Act of 2007 beyond December 31, 2012, homeowners who sell their home in a short sale after that date could be looking at an increase in their tax bill. There has been discussion in Congress to extend the deadline for another year, but borrowers who may be underwater on their mortgage or short sale sellers may not want to wait and see if Congress takes action. The following are some important facts about the Mortgage Forgiveness Act: 1
To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion. Debt forgiven on second homes would not qualify or home equity loan not used to substantially improve the residence would not qualify.
The limit is up to $2 million of debt for married couples on your principal residence and up to $1 million if married and filing separately.
Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion. However in some cases, such as insolvency, non-recourse loans, certain farm debts and bankruptcy may be applicable for forgiveness.
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. IRS Form 982 provides more details.
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. 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.
Finally, don’t forget to consult a financial or tax professional to ensure you qualify for the Debt Relief Program.
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* The information contained in this flyer is intended for general informational purposes only and should not be construed as legal advice.
A brief informational summary of recent changes in national legislation regarding the Mortgage Forgiveness Debt Relief Act of 2007 and how i...