Some Hennepin County homeowners may be relieved to learn that the Mortgage Forgiveness Debt Relief Act was renewed by lawmakers last month. The act gives homeowners who participated in a short sale or other transaction which resulted in part of their mortgage debt being forgiven a break on what would normally be considered taxable income. Anyone who falls under this tax break and had cancelled debt of more than $600 should receive a Form 1099C, which is a Cancellation of Debt from their lender.
The Form 1099C will include the amount of debt forgiven as well as a fair market value of any property that was given up through foreclosure or a short sale. The Mortgage Debt Relief Act of 2007 created the exception for "qualified principal residence indebtedness," which should apply to the vast majority of homeowners who participated in a short sale. If this law had not been extended another year, anyone who had forgiven or cancelled debt by a mortgage lender this year would have been required to claim that debt as income on their tax returns.
The law was enacted as the foreclosure crisis started to hit record numbers. In addition to short sales and foreclosure debt forgiveness, debt that has been reduced through a mortgage modification or restructuring also qualifies under the program. One attorney pointed out that it is important for homeowners to understand that some lenders, even in cases where they inform you and the Internal Revenue Service your debt has been cancelled will still attempt to collect that debt, in some cases turning the case over to a debt collection agency. This is especially true for short sales, he said.
Anyone involved in a short sale or mortgage modification should clearly understand all the terms and conditions of the transaction before the deal is completed. Although the forgiven debt may be excluded from taxable income it still must be reported on a Form 982 and attached to your tax returns. Anyone who has had mortgage debt forgiven through a short sale, foreclosure or principal reduction through a mortgage restructuring could benefit from a review by a tax professional to ensure their paperwork is in order and they meet the qualifications for the income exclusion.
Source: eCredit Daily, "Mortgage Forgiveness Debt Relief: Expect Tax Form 1099-C from Lender," Feb. 3, 2013
To learn more about our Hennepin County law firm's services, including tax litigation, offers in compromise and tax appeals, please visit our website.