What Is Mortgage Forgiveness or Canceled Debt Relief?
Important: The Mortgage Debt Relief Act of 2007 allowed you to exclude from income any debt forgiven on your primary home, but the Act expired at the end of 2013. Any debt that is forgiven in 2014 or later is taxable income. However, the information below can be used for 2007-2013 Tax Returns.
The mortgage crisis has hit many taxpayers hard, and mortgage workouts, refinancing, and home foreclosures have been the results. The last thing you need is another tax burden. But there is tax relief available if you have refinanced your mortgage, lost your home through foreclosure, or otherwise had some or all of your mortgage forgiven.
What Kind of Canceled Debt Qualifies?
Debt that qualifies for exclusion from your taxable income includes debt reduced through mortgage refinancing or restructuring as well as mortgage debt forgiven in connection with a foreclosure. You must have used the proceeds from the canceled or refinanced debt to buy, build, or improve your primary home, and the debt must be secured by your home. Proceeds of forgiven debt used for other purposes, such as to pay off a different debt, do not qualify for exclusion.
How Much Canceled Debt May Be Excluded?
Up to $2 million of forgiven debt is eligible for this exclusion for all filing statuses except for Married Filing Separately (the exclusion limit is $1 million if Married Filing Separately). If you refinance your mortgage, the refinanced debt may be excluded up to the amount of what the mortgage principal was prior to the refinancing.
How Do I Exclude Canceled Debt from My Taxable Income?
To claim this special canceled mortgage debt relief, file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, which indicates the type and amount of debt forgiveness to be reduced from your gross income, with your tax return. The proper form will be selected for you by the efile.com tax software during your online tax return preparation.
Can I Exclude Other Kinds of Canceled Debt?
Debt forgiven on second homes, rental property, business property, credit cards, car loans, etc. does not qualify for exclusion. In some cases other kinds of tax relief, based on insolvency or inability to finance debt may be available. For example, debt canceled by a bankruptcy is not considered taxable income.
What Do I Need to Report My Canceled or Forgiven Debt?
If you had forgiven or canceled debt, you should receive a Form 1099-C from your lender. This form will show the amount of debt forgiven and the fair market value of any property given up through foreclosure. A winning bid at a foreclosure auction is frequently considered to be a property's fair market value even if the amount may not necessarily reflect the property's true value.
If you receive a Form 1099-C, you should check it carefully and notify your lender if any of the information on the form is incorrect. Pay special attention to the amount of debt forgiven (shown in Box 2) and the value listed for your home (Box 7) because you will need to report these figures on your tax return.
Sample Form 1099-C, Cancellation of Debt
If I Have Home Foreclosure, What Are My Debt Relief Options?
You should consider your options carefully before giving up your home through foreclosure. If the debt wiped out through foreclosure exceeds the value of the foreclosed property, the difference is normally taxable income. But a special rule allows insolvent borrowers to offset that income limited by the amount their liabilities exceed their assets. But be careful; under the law, relief may be limited or unavailable in some situations where, for example, part or all of a home was used for business or rented out.
Taxpayers who find they owe additional tax can use a simple form to request an installment payment agreement with the IRS. In some cases, eligible taxpayers may qualify to settle their tax debt for less than the full amount due using an offer-in-compromise.
For more information about the topics on this page, please see Publication 4681 - Canceled Debts, Foreclosures, Repossessions, and Abandonments.