Mortgage Debt Cancellation Relief Act

Mortgage Debt Cancellation Relief Act

 

Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers don't have to report forgiven mortgage debt on their main home as income on their tax return. Debt forgiven in a foreclosure or reduced by restructuring the mortgage may qualify.

Significance

• Prior to the Mortgage Forgiveness Debt Relief Act, property owners had to report forgiven mortgage amounts as income. Under the act, the amount of the loan the lender cancels isn't subject to income tax.

Time Frame and Limits

• The act is valid for income tax years 2007 to 2012. According to the IRS, $2 million is the maximum amount of forgiven mortgage debt that can be excluded from income tax, or $1 million for married taxpayers filing separately.

Eligibility

• Provisions of the act apply only to homeowners who went through a foreclosure, received a loan modification, or completed a short sale on their principal residence. The forgiven loan must have been used for the taxpayer's primary home, including building, buying, substantially improving or refinancing the residence. Secondary homes, rental or investment properties are not eligible.

Considerations

• Depending on taxable income, filing status and other individual factors, the entire amount of a foreclosure debt might not be eligible. Homeowners should consult a certified tax professional for details