The Mortgage Forgiveness Debt Relief Act of 2007 was enacted to help homeowners who restructured their loan. If a mortgage for your primary residence is cancelled or forgiven, you may be able to exclude that income from your year-end tax return. Read about the Mortgage Forgiveness Debt Relief Act qualifications to see if any of your recently forgiven debt can be left off your tax return.
Meaning of Exclusion from Income
Generally, if a debt you owe is either forgiven or cancelled, you must then include the forgiven amount as part of your taxable income on your tax return. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows certain types of cancelled debt from your primary residence to be excluded from your taxable income, which in turn saves you money. Some examples of this are debt that was connected to a foreclosure and debt that was reduced through restructuring your mortgage.
Mortgage Forgiveness Debt Relief Act Qualifications
The Debt Relief Act applies only to debt you take on from building or buying your home, performing any substantial renovations on your home, or refinancing your mortgage in order to buy, build or renovate. If your debt falls into one of these categories, and was also secured by the home, it is known as qualified principal residence indebtedness. This cancelled debt can qualify for the act and be excluded from your tax return if it was acquired between 2007 and 2013. To exclude this debt, you must fill out and attach Form 1099-C, Cancellation of Debt, which you can obtain from your lender or from the IRS website, http://www.irs.gov/pub/irs-pdf/f1099c.pdf.
Limits on the Amount of Forgiven Debt
You can only count a total amount of up to $2 million as qualified principal residence indebtedness. This amount drops to $1 million if you are a married couple filing separately. Keep in mind, however, that if the cancellation of debt is due to services performed by your lender, or not related to the home’s reduction in value or the taxpayer’s financial situation, then it is not qualified for the relief act.
Important Note About Mortgage Forgiveness Debt Relief Act Qualifications
The information in this blog is provided simply to make you aware of the general terms of the Mortgage Forgiveness Debt Relief act qualifications. It should not be construed as financial or tax advice. If you have any unusual situations such as forgiven mortgage debt, it is best to consult with a tax advisor.