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Mortgage Debt Forgiveness Relief Legislation
Authored by Senator Debbie Stabenow
Declining home prices and rising foreclosure rates have left some families having to sell their homes for less than they paid for them, and sometimes for less than the outstanding debt. The IRS used to tax any loan forgiveness as “income”. Senator Stabenow’s legislation that was signed into law last year relieves families of the tax burden when their lender forgives part of the mortgage on a principal residence.
There are three instances
in which homeowners were unfairly taxed before the mortgage debt forgiveness
relief legislation became law:
- Short Sale: A homeowner with a mortgage of $100,000 is making payments on time and decides to sell their home. Because of declining values, they are only able to sell the home for $80,000, still owing $20,000—a short sale. If the lender forgives the remaining $20,000, the homeowner would owe taxes on the $20,000.
- Foreclosure: A family’s home is foreclosed upon and they owed $150,000. The bank resells it for a lesser amount of $125,000. The family would have to pay taxes on the $25,000 difference.
- Voluntary Restructuring: A family is paying a $200,000 mortgage and can’t afford it. The bank reduces their mortgage to $150,000 to reflect the drop in market value. Under current law, the family would have to pay taxes on the difference. In this case, the family would have to pay taxes on $50,000.
How do I file my taxes when I receive a 1099 for this forgiven debt?
In order to record this debt on a 1040 form, taxpayers should use an updated version of IRS form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. A version is being revised due to the legislation, but it will not be available until the end of February. For reference, the current version is dated 01-2006: http://www.irs.gov/pub/irs-pdf/f982.pdf. This form should be attached to your tax form.
Is the mortgage forgiveness amount on the 1099 form included in my overall income for the applicable year?
No. The amount is not included in the income for the applicable year.
I received a 1099 for a foreclosure that happened in June 2007. Can I take advantage of this legislation since it became law after that?
Definitely! You can take advantage of this legislation if you have a 1099 as a result of one of the three instances above. It must have taken place anytime from January 1, 2007 through December 31, 2009.
What is the financial limit of what can be excluded from income?
Taxpayers can exclude up to $2 million of debt forgiven on their principal residence. The limit is $1 million for a married person filing a separate return.
I am in the foreclosure process right now. What do I tell my bank if I would like to do this?
You ask the bank if they can forgive the debt that you owe after the foreclosure process (or any of the instances in which it applies). If the bank opts to do it, when you get your 1099, you just follow the steps above.
What if I don’t get my 1099 until after I have filed my taxes for one of the applicable years (2007, 2008 or 2009)?
All you need to do is amend your return for that particular year.
I have a question that has not been answered here. What do I do?
You can contact a tax preparer or look on the IRS’s website. But please feel free to contact our office and we will do our best to answer the questions for you.
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