Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. Details are on IRS Form 982 and its instructions, are now available on the IRS Web site.
This relatively new law applies to debt forgiven in 2007, 2008, and 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. The debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.
Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1009-C) from their lender. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.
For additional questions regarding this new law, call attorneys Smith & Weer. We’ll be happy to answer any questions you may have.
