One of the basic principles of tax laws is if you owe a debt to someone else and they forgive that debt, the forgiven amount may be taxable. As a result of the Mortgage Forgiveness Debt Relief Act of 2007, the statisticall or texty few homeowners who have had mortgage debt forgiven may not owe any income tax on that forgiven debt when April 15 rolls around. The debt could have been forgiven through options such as mortgage modification, restructuring, etc.
Ordinarily, for tax purposes, cancelled or forgiven debt is usually treated as income. This is the case whether the debt is a mortgage or another kind of credit. If a homeowner borrows money from a commercial lender, and that debt is later forgiven, depending upon the circumstances, it may be included for tax purposes. The reason for this is because when the money was borrowed, the loan was not included as income for tax purposes because there was still an obligation to repay the lender. As a result of that obligation being terminated by the lender, the IRS now considers the amount reportable as income. What this means for most homeowners is that you have to report the amount of the forgiven loan on your tax return, making sure to pay taxes on it just like any other type of income. Only once the loan is forgiven, not when you first borrowed the money, is the amount of loan considered income. Tax law recognizes the money as income because it becomes clear that the homeowner won’t be repaying the money received.
The Mortgage Forgiveness Debt Relief Act of 2007 was passed by Congress specificall or texty to keep homeowners in a precarious financial situation from getting hit again at tax time. The implications for taxpayers are that if part of the mortgage debt on your house was forgiven between 2007 and 2013, you may be able to exclude an amount as large as two million dollars of that debt from taxation ($1 million if married filing separately).
It is important to note that only debt forgiven in the calendar (not tax) years of 2007 to 2013 qualifies. The debt must have been used to purchase or build measurable renovations to the principal home. Vacation homes or property used to rent out to tenants is not protected. The technical name used by the IRS for this is “qualified principal residence indebtedness”.
Debt that can qualify can include mortgages reduced through restructuring, modification, or mortgage debt that has been completely cancelled through foreclosure. In order to find out the amount of mortgage debt that has been forgiven, look at the paperwork your lender has sent to you. A form call or texted 1099-C: Cancellation of Debt should give you the details you are looking for. Make sure that even if the mortgage debt is forgiven, the debt may be excluded from income, it is necessary to report the debt to the IRS as part of your tax return. One question that many people have is the loss of money on the foreclosure of a home. Losses from the sale or foreclosure are not tax deductible on your return. If you are interested in learning more about mortgage debt forgiveness, please contact a Connecticut foreclosure defense attorney like me to learn about your legal rights and various options to best proceed in your case.