In December 2007, the Mortgage Forgiveness Debt Relief Act was passed by the law. With this act, the debtors of home loans whose loan balance payments were canceled are given a tax relief. Earlier the debtors faced taxes on the amount that were forgiven by the lenders. Mortgage Relief Act helps in that case.
Generally any time you have a foreclosure or a cancelled debt you are hit with a second hardship – a tax bill. Lenders who have forgiven a debt issue a Form 1099-C, Cancellation of Debt, which shows both the taxpayer and the IRS the amount that was forgiven. The IRS considers this to be taxable “other” income since that amount is money the taxpayer received but is no longer required to pay back to the lender. But in 2007, the Mortgage Debt Relief Act was passed to help homeowners avoid the double-edged sword of losing their house and having to pay taxes on the forgiven debt amount. The Act is in effect for mortgage debts cancelled from 2007 through 2012.
How Does the Mortgage forgiveness debt relief act Protect Me? The Mortgage Forgiveness Debt Act allows taxpayers to exclude from their taxes certain cancelled debts on their principle residence. The debt must be secured by their home and can apply to a first mortgage, funds secured to substantially improve the residence or a refinance. This includes debts reduced through mortgage restructuring or forgiven due to foreclosure. The maximum amount of debt that qualifies for this exclusion is $2 million or $1 million if married filing separately. You will still have to pay taxes on any amount forgiven over this limit. Additionally, the Act does not allow you to exclude cancelled debt from a second home, credit cards or car loans.
To make use of the Mortgage Relief Act, you need to get your tax papers documented well. You also, have to duly fill the 540X Form after your tax papers are ready. Another important thing is to mention the words, Mortgage Debt Relief as the heading of your 540X Form. You must use red ink to write these words.
What Can I Do if My Cancelled Debt Doesn’t Qualify Under the Act? There are other exceptions that allow cancellation of debt to be non-taxable. In addition to mortgage forgiveness, other reasons include: Bankruptcy. Debt forgiven through bankruptcy is not taxable as income. Insolvency. If you are insolvent, meaning the total of your debts before the cancellation is more than the fair market value of your assets. You may only exclude the amount of your cancelled debt that does not exceed the amount of this difference. So, if your assets are worth $25,000 and your debt totals $35,000 the difference is $10,000. If a lender forgives $15,000 of debt, $10,000 will be excluded and $5,000 will be taxable. Non-recourse loans. If the loan is secured by personal property and the only recourse for default of the loan is repossession of that property, the lender cannot pursue you personally for the defaulted amount.
Learn more about Obama Mortgage Relief Plan Qualifications.
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Tags: Debt, Debt Relief Act, forgive debt, mortgage, Mortgage Debt, Mortgage Forgiveness Debt Relief Act