Bankruptcy Foreclosure Mortgage Forgiveness Debt Relief Act of 2007

Foreclosure Mortgage Forgiveness Debt Relief Act of 2007

Mortgage Forgiveness

The Foreclosure Mortgage Forgiveness Debt Relief Act of 2007 was due to expire on December 31, 2012. But it has been extended to 12-30-2013. The Mortgage Forgiveness Debt Relief Act eliminates any income tax that happens from unpaid debt or debt forgiveness for a mortgage on your primary home. The IRS can assess income tax from a short sale or mortgage modification. Without a Bankruptcy or the Mortgage forgiveness act, any deficiency or unpaid debt will be treated as ordinary income and taxed accordingly. If you don’t meet these criteria consider bankruptcy to avoid a 1099 tax problem.

Example: If a property sells in a short sale, deed in lieu, foreclosure, or there is a mortgage modification, and the mortgage company loses 100,000, the mortgagor reports income for 100,000 on a 1099C.

Foreclosure Mortgage Forgiveness Debt Relief Act of 2007

Mortgage modifications and shorts sales are complicated processes.  Homeowners are already struggling. In November 2012, forty-one state attorney generals appealed to Congress, asking that the Mortgage Forgiveness Debt Act be extended. However, it appears that it will shortly expire. But here are some of the rules of the act.

  1. To qualify, you have to use 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Just attach it to your federal income tax return for the tax year in which the qualified debt was forgiven. Bankruptcy filed before charging off the mortgage or forgiveness always qualifies for exclusion from income.
  2. Under the Foreclosure Mortgage Forgiveness Debt Relief Act of 2007, you may exclude up to $1 million per person of debt forgiveness.  You can have 2 million for a couple, but it must be for your principal residence. But special rules apply.
  3. The debt must have been used to buy, build, or substantially improve your principal residence.  That residence must also secure the mortgage.
  4. Refinanced debt for substantially improving a principal residence qualifies.
  5. Any other purpose, like buying a car, does not qualify for the exclusion.
  6. Vacation or second homes, rental property, business property, do not qualify.  The Mortgage Forgiveness  Debt Relief Act or 2007 is an exclusion from the tax provisions as income.
  7. If any debt is reduced or eliminated, you will receive Form 1099-C, Cancellation of Debt, from the lender. Refer to form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness.
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