The Mortgage Debt Relief Act: What Is It and How It May Benefit You
2013 marked the passing of H.R. 8 legislation in the House and Senate which includes the extension of several important housing-related federal tax provisions. Had Congress not acted, the tax code would have reverted to its pre-2007 treatment of mortgage principal reductions or cancellations by lenders whereby principal balances written off would be treated as ordinary income to the homeowners who received them.
Extended through January 1, 2014, the Mortgage Debt Relief Act is something that some taxpayers can qualify for, especially if you've undergone a hardship such as mortgage restructuring, short sale or foreclosure. These situations include indebtedness on a qualified principal residence, bankruptcy, insolvency, certain farm debts, and non-recourse loans. The program helps you to exclude income from the discharge of debt so that the canceled amount is not reported as income for tax purposes.
A few key points to consider:
The Debt Relief Act applies to debt forgiven from 2007 through January 1, 2014.
· Consult a finance or tax professional to ensure you qualify.
- The debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion. Proceeds of refinanced debt used for other purposes (ie. credit card debt) do not qualify for the exclusion.
· Up to $2 million in debt is eligible for exclusion for married couples, or $1 million if married and filing separately. If the total liabilities exceed the total assets and the forgiven debt doesn't qualify under this particular provision, it may qualify under the insolvency 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, business or personal property, credit cards, or car loans does not qualify for the tax relief provision.
- If your debt is reduced or eliminated, your lender will send you a year-end statement, Form 1099-C, Cancellation of Debt, which also goes directly to the IRS. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
· Examine Form 1099-C closely. Pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7. Notify your lender immediately if there are any inaccuracies.