Forgiven Mortgage Debt Taxable?

Mar 22, 2013 by

Foreclosure NoticeWith the U.S. housing market bloodbath that began in 2008, the tax consequences of forgiven mortgage debt has wider relevance than in pre-meltdown America. If your lender cancelled or forgave a part of your mortgage, will you now be subject to insult after injury? Generally, the IRS considers the part of a mortgage forgiven or cancelled to be taxable income.

Don’t Panic Yet—There Are (BIG) Exceptions

Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, I think many—if not most—taxpayers whose lenders cancelled or forgave mortgage debt in 2012 won’t owe tax. Your forgiven mortgage amount may not be taxable if any of these apply:

  1. The debt was a mortgage on your main home.
  2. The debt had been used to buy, build, or substantially improve your principal residence, and the residence secured the mortgage.
  3. The maximum forgiven debt you can exclude from taxation is $2 million. (That likely doesn’t count out too many Money Counselor readers.)
  4. Mortgage debt reduced through a restructuring or cancelled in foreclosure may be excluded from taxation.

Did You Get a 1099-C?

If your lender is on the ball, it should have sent you a 1099-C, Cancellation of Debt, if more than $600 was cancelled. If you got one of these, so did the IRS, so be sure it’s accurate. If it’s inaccurate, contact your lender immediately and ask for a corrected statement.

IRS Form 982

If you believe you qualify for exclusion of forgiven debt from taxation, add another form to your stack: IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). Gotta love those IRS wordsmiths.

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