Mortgage
Debt Forgiveness: 10 Key Points

First, if you have filed bankruptcy then forgiven debt is not taxable income and simply filing IRS Form 982 with your federal taxes will cancel that debt.

For non-bankruptcy filers, the following may be applicable to your situation:

Canceled debt is normally taxable to you, but there are exceptions. One of
those exceptions is available to homeowners whose mortgage debt is partly or
entirely forgiven during tax years 2007 through 2012.

The IRS would like you to know these 10 facts about Mortgage Debt
Forgiveness:

1. Normally, debt forgiveness results in taxable income. However, under the
Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to
$2 million of debt forgiven on your principal residence.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude debt reduced through mortgage restructuring, as well as
mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially
improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving
your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes – for example, to pay
off credit card debt – do not qualify for the exclusion.

7. If you qualify, claim the special exclusion by filling out Form 982,
Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to
your federal income tax return for the tax year in which the qualified debt was
forgiven.

8. Debt forgiven on second homes, rental property, business property, credit
cards or car loans does not qualify for the tax relief provision. In some
cases, however, other tax relief provisions – such as insolvency – may be applicable.
IRS Form 982 provides more details about these provisions.

9. If your debt is reduced or eliminated you normally will receive a
year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By
law, this form must show the amount of debt forgiven and the fair market value
of any property foreclosed.

10. Examine the Form 1099-C carefully. Notify the lender immediately if any
of the information shown is incorrect. You should pay particular attention to
the amount of debt forgiven in Box 2 as well as the value listed for your home
in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007,
visit www.irs.gov.
IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and
Abandonments, is also an excellent resource.

You can also use the Interactive Tax Assistant available on the IRS website
to determine if your cancelled debt is taxable. The ITA takes you through a
series of questions and provides you with responses to tax law questions.

Finally, you may obtain copies of IRS publications and forms either by
downloading them from www.irs.gov
or by calling 800-TAX-FORM (800-829-3676).

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