Tax Relief for Foreclosures and Canceled Debts

Here are some more of the details about the Mortgage Forgiveness Debt Relief Act of 2007 and how it impacts your taxes. Here is a snippet...

Highlights of Mortgage Debt Relief

* Exclude up to $2 million of debt forgiven or canceled by a mortgage lender on a main home.
* Both mortgage restrucuring and foreclosures qualify
* Available for the years 2007, 2008, or 2009.
* Claim the tax relief using IRS Form 982 (PDF)

What is Canceled Debt Income?
Anytime a lender cancels, or forgives, your debt, that is considered income to the debtor. The tax laws considers this income, and the debtor is taxed on forgiven debt unless an exception applies.

Canceled Debt That is Taxable
Anytime a lender cancels or forgives debt, that is usually a taxable event. "Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income." (Source: Publication 525)

Debt forgiveness is reported by the lender using Form 1099-C, Cancellation of Debt. Individuals report the forgiven debt on their Form 1040, Line 21 as other income.

The tax laws provide several exceptions to the tax treatment of forgiven debts. Tax-free treatment of mortgage debt is the most generous and easiest to calculate.

The whole article can be seen here.