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By Sean A. Kelly
The Mortgage Debt Relief Act 2010 is in reality a debt relief option that is offered to you by the government to help you navigate through the current rough economic patch. Under federal law, if a creditor forgives a loan balance that is larger than $600, the creditor would have to fill up Form 1099-C to record this forgiven debt. This forgiven debt would then be considered as taxable income for the debtor. But with the existence of the Mortgage Debt Relief Act 2010, the federal government has been generous enough to write off up to $2 million of forgiven debt on your principal home for your taxable income calculation purposes. The limit is nevertheless capped at $1 million if you are a married person that is filing a separate return from your spouse, but it still does reduce your tax liability considerably.
With the existence of this act, from the tax years of 2007 all the way up to 2012, if you have mortgage debt that has been entirely or partly forgiven, you can now apply for a special tax relief for this forgiven debt. This includes the mortgage debt that has been compromised through methods such as mortgage modification, mortgage restricting programs as well as debt that has been forgiven through foreclosure proceedings. To be eligible for this tax relief program, your mortgage debt must have been utilized to, buy, construct, renovate or improve your principal residence. In other words, your debt must have been used to purchase or better your principal mortgage, with no exceptions to this clause. Those who have utilized refinanced debt proceeds (for instance home equity loans or home equity line of credit loans) to improve or renovate their principal residences are also considered eligible for this tax exclusion.
For reporting purposes, the amount of forgiven debt must be reported with the use of Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness). You could obtain this form by downloading a copy from the http://IRS.gov website or by contacting 800-829-3676 to request for your copy. This form would be submitted with the taxpayer’s federal income tax return submission documents before they are sent to the Internal Revenue Service (IRS) for evaluation. The special exclusion should be claimed during the tax year in which the mortgage debt was forgiven by your lender. Do take note that before you file the forgiven debt amount in Form 982, you would first need to go through Form 1099-C (Cancellation of Debt) that is provided at the end of the year by your lender if any of your debt is reduced or eliminated. You would need to make sure that the amount of forgiven debt in Form 1099-C is correct, and this amount would be the figure that you would report in Form 982 before you submit the form with your income tax returns.
You may keep in mind that you would only qualify for the Mortgage Forgiveness Debt Relief Act only if the debt is related to your principal residence, and not your secondary residences. Proceeds of refinanced debt that are utilized for other purposes do not qualify for this tax exclusion as well. For instance, if you have used returns of refinanced debt to pay off your credit card debts or to settle your student loan debt, these amounts do not qualify for the tax exclusion. You would also not qualify for this tax exclusion if your forgiven debt is for your second home, business property, automobile loan or even rental property.
This government debt relief option is undoubtedly a good effort to help struggling homeowners cope better with high back taxes and tax liabilities. The ability to apply for this tax relief of up to $2 million should help countless citizens reduce the amount that they have to pay back to IRS in terms of outstanding tax liabilities and back taxes, and would go a long way to help the nation recover economically.
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