Mortgage Debt Forgiveness Act - a welcome tax law for homeowners about to come to end in 2012.

Real Estate Agent with Helix Properties, LLC

As you may of heard, we sell many short sale homes. A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties (buyer and seller) consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. 

In 2007, the congress passed the Mortgage Debt Forgiveness Act which was enacted to help homeowners not get into further debt. This law in a nut shell allows the homeowner to short sell their primary residence and not be taxed by the IRS for the amount forgiven. Prior to this act, any debt forgiven was taxed by the IRS as unearned income. In other words, if you short sold your home for $100,000 below your mortgage amount, the IRS would tack on $100,000 onto your regular income and you would be taxed as if you made an additional $100,000. As you can imagine, this could be a problem for the long term. 

I thought it might be good to review the Mortgage Debt Forgiveness Act and the specifics of the law. Call me with any questions but I want to highlight that it's important to speak with your CPA on how this law effects your specific situation.

Mortgage Debt Forgiveness Act Revisited
If you had mortgage debt forgiven this past year, whether it was through a short sale or perhaps mortgage modification then you may be able to claim special tax relief and exclude the debt forgiven from your income. That is because the Mortgage Debt Forgiveness Debt Relief Act of 2007 allows for owners of primary residences to avoid paying taxes on this forgiveness under certain circumstances. Here are 10 facts directly from the IRS in regard Mortgage Debt Forgiveness. Note that this act will expire in 2012 and no indication of extension has been indicated.

1) Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

2) The limit is $1 million for a married person filing a separate return.

3) You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4) To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5) Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6) Proceeds of refinanced debt used for other purposes -- for example, to pay off credit card debt -- do not qualify for the exclusion.

7) 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.

8) 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, however, other tax relief provisions -- such as insolvency -- may be applicable. IRS Form 982 provides more details about these provisions.

9) 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.

10) 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.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, please visit http://www. and as always consult a tax professional with specific questions you may have.

Call us with any questions. 

Deepak Verma
Team Advanta Real Estate
Helix Properties, LLC
602) 295-0810
602) 218-4361 (fax)

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