The Mortgage Relief Act was passed in 2007 as a way to help consumers who have been struggling with debt. Normally, if your home debt is forgiven through foreclosure, mortgage restructuring, or otherwise reduced, it is considered income. As with any other income, then it is subject to income tax.
With the relief law, if the debt cancellation is for your primary residence, you won’t need to pay taxes on it. Also, if the debts are discharged because you filed for bankruptcy or were insolvent, you are also excluded from paying taxes. Regarding refinancing, this is also excluded, however, only with respect to the principal balance of the previous mortgage.
The original law was intended to cover the debt canceled in the years 2007, 2008 and 2009.
However, due to the housing crisis in California, the state has expanded this law to include debt forgiveness through the end of 2012. The limits for this are $500,000 or $250,000 for married or registered domestic partners who choose to file. a separate statement.
To be excluded from paying taxes, you will need to complete a specific form with the IRS, Form 982. Your lender will send you a Form 1099-C and the amount must match the amount you put on Form 982. If you disagree with the amount on your lender’s form, be sure to discuss this with them.
Debt forgiven on your second home cannot be excluded under this law. Only canceled debt or refinancing debt used to build, improve, or buy your main home can be excluded. There may be other tax laws that can help you with other types of debt.
If you think you qualify for this exclusion, you can get more information about the Mortgage Relief Act from the IRS or by speaking with an accountant. But definitely take advantage of the help to get back on your feet.