Mortgage Forgiveness Debt Relief Act
The IRS and Congress have provided for mortgage forgiveness debt relief in the act that went into law on December 20, 2007.
What this act does is to provide relief for the reporting of phantom income for the relief of a mortgage debt not paid. Under the old rules if you were given relief of debt without filing for bankruptcy on the debt then that forgiveness of debt would have to be reported as income on your tax return and you would pay income tax on that forgiveness. (Sort of wonder why they call it forgiveness when it costs you tax dollars?)
Now under the new rules that apply for tax years 2007, 2008 and 2009, the forgiveness of debt due to foreclosure on your principal residence is not income if the new IRS
Form 982 is used in your tax return.
Even debt forgiveness after a refinance will qualify under most situations.
What will happen at the end of the tax year?
Your lender will give you a form 1099-C, cancellation of debt, by January 31, 2009. That is the amount of the loan forgiveness that should qualify for the exclusion into income. That is the form that will be used by us to prepare the form 982.
There is another section of this act that applies to second homes and rental property.
That section deals with “insolvency” This section of the new code is extremely complicated and much caution must be taken to determine if the forgiveness of debt will be non taxable.
If the property has been refinanced and the refinance is for more than the original purchase price of the property then there may be income that must be reported on the tax return and taxes may be due.
Each case will be different when we apply the rules to a tax return. More information will be needed in the preparation of this form than what most clients have become use to in our annual tax return preparation.
