Form 1099-C: If your debt is reduced or eliminated, you will normally receive a year-end statement, Form 1099-C, Cancellation of Debt from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed. Examine Form 1099-C carefully and notify the lender immediately if any of the information shown is incorrect. Note the amount of debt forgiven in Box 2 as well as “home value” listed in Box 7.
If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you might be able to claim special tax relief and exclude the debt forgiven from your income, according to a tax tip e-mailed from the Internal Revenue Service. ?It provides the following facts about mortgage debt forgiveness:
$2 million forgivable: Normally, debt forgiveness results in taxable income, but under the Mortgage Forgiveness Debt Relief Act of 2007, you might be able to exclude up to $2 million of the debt forgiven on your principal residence. The limit for a married person filing a separate return is $1 million.
Principal residences only: You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
Non-qualifiers: Proceeds of refinanced debt used for other purposes, such as paying off credit card debt, do not qualify for the exclusion.
Form 982: If you qualify, claim the special exclusion by filling out IRS “Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness”?and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
Second homes: Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions, such as insolvency, might be applicable. IRS Form 982 provides more details about these provisions.
Call for info: See more information on the act in IRS “Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments” on the IRS website. These forms and publication are also available by calling 800-829-3676.