Mortgage Forgiveness Debt Act
- The Mortgage Debt Forgiveness Relief Act was established in 2007 in response to the high number of foreclosures occurring in the housing market. It was intended to exist for only a short period of time, but the act now has been extended through 2012 to help homeowners escape additional penalties if they lose their property to foreclosure or short sale.
- Not all forms of debt are forgivable through the Mortgage Debt Forgiveness Relief Act. The act only will cancel what is known as "qualified principal residence indebtedness." This includes debt incurred when buying, building or improving the residence that was secured using the home for collateral. For example, if a portion of your mortgage debt is forgiven when you refinance a home, the debt will qualify since the original debt was incurred in the process of buying the home. However, debt incurred through home equity loans used to purchase items outside of the home, if forgiven by the lender, would not qualify for debt relief with the IRS .
- For a married couple filing jointly, only $2 million in qualified principal residence indebtedness is permitted. For a married couple filing separately, only $1 million is permitted. If the balance of debt forgiven was greater than this amount, you will not be able to have all of the debt forgiven by the IRS, and you might have to pay taxes on the forgiven debt as a result. For example, an individual who has a $2.5 million debt forgiven would owe taxes on the amount outstanding the limit; this person would owe taxes, then, on $500,000.
- To submit a request for forgiven debt under the act, you must file Form 982. This is the Reduction of Tax Attributes Due to Discharge of Indebtedness form. You would only need to fill out lines 1e and 2. If you are keeping the home, you also need to fill out line 10b. The form is filed with your tax return. You can find out the sum of debt that was forgiven through a 1099 provided by your lender.
- A short sale of a home still renders you eligible for forgiveness. In a short sale, the lender allows you to stop mortgage payments and sell your property. The lender accepts the property's sale as complete payment on the loan even if the sale amount is lower than the remaining mortgage balance. The total debt the lender forgave after the sale is the indebtedness income you received. Your lender will send a 1099 if the amount is more than $600.
