The Internet is buzzing about the expiration of Mortgage Debt Forgiveness lately. What is this Mortgage Forgiveness Debt Relief Act everyone is talking about? Let me clarify this law for all the homeowners who want to get rid of their bad investment, or have recently short sold their homes. Remember, the sooner you get rid of your bad investment, the sooner you can get into a good investment.
The Mortgage Forgiveness Debt Relief Act was introduced by Congress on Sept. 25, 2007, and it became law on Dec. 20, 2007. This act offered relief to homeowners who owed taxes on forgiven mortgage debt after a short sale or foreclosure. Under the Emergency Economic Stabilization Act of 2008, this tax relief was extended for another three years, covering debts discharged through the end of calendar year 2012.
Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you might be able to exclude up to $2 million of debt forgiven on your principal residence.
The limit is $1 million for a married person filing a separate return.
You might 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 exclusion.
Refinanced debt proceeds used for substantially improving your principal residence also qualifies for the exclusion.
Proceeds of refinanced debt used for other purposes — for example, to pay off personal credit card debt — do not qualify for the exclusion.
If you qualify, claim the special exclusion by filling out 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.
Debt forgiven on second homes, rental property, business property, credit card and car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions — such as insolvency — could be applicable. IRS Form 982 provides more details about these provisions.
If your debt is reduced or eliminated, you normally will 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 or sold.
Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect.
I highly recommend hiring a CPA to file your income taxes after a short sale. Most homeowners find the paperwork after a short sale to be extremely complicated and confusing. It may be worth your peace of mind to pay someone to get it done correctly.
If your income tax return is not filed correctly, you could end up paying someone a larger fee to undo the mistakes. Consult a tax professional who has the experience helping short sale homeowners. You will be happier you did.
Since short sales are very common in recent years, ask your friends or family members to recommend someone. Consult with a few tax professionals and check up on their experience. Ask for testimony from happy clients before you hire them to file your income tax.
Next week’s column: You can short sell now and buy immediately. There is no need to rent.
Annie Christian is a real estate broker and owner of The Annie Christian Real Estate Group. She helps with everything from buying and selling to foreclosure and short sale. To submit a question, call 351-5117. Her website is www.anniechristian.com.