Regardless of the circumstances of your foreclosure, you could receive a 1099 from the IRS.
Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness.
Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you could exclude up to $2 million of debt forgiven on your principal residence.
The limit is $1 million for a married person filing a separate return.
You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
The debt qualifies if it is for buying, building or substantially improving your principal residence and is secured by that residence.
Refinanced debt proceeds used to substantially improve your principal residence also qualify for the exclusion.
Proceeds of refinanced debt used for other purposes such as paying off credit card debt can not qualify for the exclusion.
If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, other tax relief provisions such as insolvency are applicable. IRS Form 2 provides more details about these provisions.
If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7. For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit http://www.irs.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossession and Abandonment, IRS Codes and Regulations.
How does the Mortgage Forgiveness Debt Relief Act work? Under federal law, a financial institution is required to file a Form 1099-C whenever it forgives or cancels a loan balance greater than $600. This may create a tax liability for the debtor because the canceled debt is considered income for tax purposes.
This Debt Relief includes the cancellation of the complete debt. If the mortgage terms were renegotiated, up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The amount of debt forgiven must be reported on Form 982 and be attached to the taxpayer’s tax return.
Be sure to report the canceled/forgiven amount on Form 982, and include that form with your income tax return. Obtaining the services of a competent tax professional is recommended.
A great site for more information about IRS Codes is United States Tax Payers Association website; membership is free.