Under the Internal Revenue Code Section 61(a)(12), cancellation of indebtedness (known as “COD”)  is considered taxable gross income.


People with distressed mortgages may be issued a 1099 by their mortgage company in several situations. (If you get the 1099, then the IRS presumes that it is income that must be reported on your tax return.)


The first situation is a loan modification.  If you modify the mortgage interest rate by approximately 5% or more, then that savings may be treated as income to you.


Second, if you give a deed in lieu of foreclosure in return for forgiveness of debt, you may be issued a 1099 the of money the mortgage company lost on the home after they sell it.


Third, if the mortgage company does foreclose and recover the property, it may at any time decide to write off any losses after the home is sold.


Generally, there are two ways that might get you out of the taxability of COD.  First, you may qualify under the Mortgage Forgiveness Debt Relief Act of 2007, ,which has been extended to the end of 2013.  Basically, cancellation of debt for the mortgage on your home is forgiven by the IRS under this federal law, assuming you qualify.


Second, a bankruptcy discharges all personal liability on that debt and the IRS under Internal Revenue Code Section 108(a)(1)(A) will not treat that discharged debt as income to you.


If you have any questions, then you should consult your tax or bankruptcy professional.  At Nye & Associates, PLLC, bankruptcy consultations are always free.  Call (989) 821-1225

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