» a credit and personal finance blog

Forgiven Debt Now Tax-Free for Many Homeowners

March 18th, 2009

Under normal circumstances, debt forgiveness results in taxable income. Not a fun position to be in if you’re the original debtor. However, in December 2007, Congress passed the Mortgage Forgiveness Debt Relief Act in an effort to provide tax relief for struggling homeowners by temporarily lifting this rule for debts forgiven on primary residences.

More recently, in October 2008, Congress extended the relief to include debt forgiven in calendar years 2007 through 2012 as well. So, if you have restructured your home loan and reduced the amount owed, or had debt forgiven as part of a foreclosure during this time, it’s important to remember that you may no longer owe taxes on that amount.

As always, there are some specific IRS regulations that must be met in order to qualify. They key items are as follows:

  • Debt forgiveness must have occurred from 2007-2012
  • The relief only applies to debt used to buy, build, or improve your personal residence
  • Cap is $2 million, of $1 million for married people filing separately
  • Debt reduced through loan modifications, as well as debt forgiven in connection with a foreclosure, short sale, or a deed in lieu of foreclosure, may qualify for this relief

You should have received a form 1099-C from your lender by the end of January, which indicates the exact amount of forgiven debt and the estimated fair market value for any property given up through the foreclosure process. Be sure to carefully review this form before filing your tax returns this year. Lenders are processing a lot more paper right now than normal, so mistakes are bound to happen.

Posted By: Joshua Heckathorn | Category: Credit Crisis, Credit News | Comments (2)

Tell a Friendshare with friends |  Subscribe |


2 Responses

  1. Brett

    25|Mar|2009

    That’s great news. It would be pretty scary to get an $80,000 1099-C in the mail because you negotiated a short sale with your lender. This forgiveness makes a lot of sense.

  2. Joshua Heckathorn

    13|May|2009

    Thanks for your comment Brett. I agree, any letter from the IRS is scary, but a 1099-C for $100K would really hurt.


Leave a reply

Subscribe without commenting

Find the best credit card for you.
What type of card are you interested in?
How much do you spend each month?

Do you ever carry a balance?


 
Creditnet Newsroom
More News
Foreclosure and Your Federal Tax Bill

When a lender forecloses on a home, it can choose to either forgive any remaining debt or pursue the homeowner for a deficiency judgment. If the lender chooses to...

Read More
How to Build Credit from Scratch

It really is a classic Catch-22. You've got to have credit to get credit. So if you have no credit history at all, how should you go about building...

Read More
Stay Connected
Disclosure: Creditnet.com has financial relationships with some of the companies featured on this site. Although we may be compensated if a visitor chooses to apply or signup for a product/service via our links, we will always give consumers our honest and unbiased opinions on the financial products/services reviewed.