Learn More About the Mortgage Forgiveness Debt Relief Act

How does the Mortgage Forgiveness Debt Relief Act work? What are the qualifications? What forms do we file with our taxes?

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Bill's Answer: Answered by Daniel Cohen

Under federal law, a financial institution is required to file a Form 1099-C whenever it forgives or cancels a loan balance greater than $600. This may create a tax liability for the debtor because the canceled debt is considered “income” for tax purposes.

However, the Mortgage Forgiveness Debt Relief Act of 2007 provides tax relief for some mortgage loans forgiven in 2007 through 2012. The Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence.

Editor’s note: The Mortgage Forgiveness Debt Relief Act was originally scheduled to expire at the end of 2012, but Congress and the President acted to extend it through 2013. It remains to be seen if they will act again and extend the protections through the end of 2014.

Regarding your question about the duplex qualifying, I can find no indication in the tax code that would disqualify a duplex from the Mortgage Forgiveness Debt Relief Act if half of the duplex was purchased for and used as your household residence.

The Mortgage Forgiveness Debt Relief Act of 2007 includes the cancelation of the complete debt. If the mortgage terms were renegotiated, up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). According to the IRS, the exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

IRS Form 982

The amount of debt forgiven must be reported on Form 982 and this form must be attached to the taxpayer’s tax return.

You qualify for the Mortgage Forgiveness Debt Relief Act if the home was your principal residence. If so, be sure to report the canceled/forgiven amount on Form 982, and include that form with your income tax return. See the IRS document “The Mortgage Forgiveness Debt Relief Act and Debt Cancellation” for more information. Whenever a Form 982 is required, I recommend that professional tax help is used to ensure the form is filled out properly.

I hope this information helps you Find. Learn & Save.




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Comments (161)

Lisa C.
Bel Air, MD  |  February 18, 2014
We had a short sale on our home back in 2009 in which there were two mortgages. The first bank was paid in full, however, the second bank was not. They agreed to let the house sell, however, they did not discharge the loan at that time even though it became unsecured. They tried unsuccessfully to collect the money we owed for four years and finally forgave the debt in October of 2013. My accountant says that because the house was sold in 2009, but the debt was not forgiven until 2013, that we may not be able to exclude the debt forgiven under the Mortgage Debt Relief Act, but I have read the act and don't see where it says that the short sale and the debt forgiveness must occur in the same year. At any rate, my accountant has no idea how to handle this and I am currently unable to file my 2013 taxes and scrambling for answers. Has anyone experienced a similar situation?
February 18, 2014
Consult with a tax lawyer, enrolled agent, certified tax preparer, or accountant for a second opinion.
St. Charles, MO  |  February 05, 2014
I've refinanced three or four times and I did a short sale in 2013. What would be the formula for what would be eligible for the Mortgage Forgiveness Act? My original purchase price in 1994 was $125,000. The debt they have forgiven is $192,000.
February 05, 2014
If this is regarding your primary residence, then I believe that you can exclude the entire amount forgiven. I recommend that you file your taxes this with a tax professional familiar with the IRS Form 982 and the provisions of the MFDRA.
Carolyn L.
Temecula, CA  |  January 14, 2014
My home was foreclosed on in 2008. I worked with the lender to complete the process. The amount financed was $504,000 and after my foreclosure, the home was sold for $199,000. Am I still liable for paying taxes on the difference ($305,000) if I was protected by the 2007 Mortgage Debt Relief Act?
January 14, 2014
Based on the information you provided, it appears you qualify for the Mortgage Forgiveness Debt Relief Act. If you qualify, you have no tax liability for the cancelled debt income. Consult with an experienced tax preparer to review your entire situation, as there may be facts you didn't mention that are relevant to this analysis.
Barb B.
Scappoose, OR  |  November 05, 2013
I have been scouring the Internet for information on a possible extension of the MFDRA and can find nothing except for an article that states that Congress is too preoccupied with Obamacare to focus on the ramifications for Americans, like myself, that would suffer financially from the expiration of the bill this December. Can you give any information that might offer some hope?
November 05, 2013
The only hope we can offer is last year at this time it appeared Congress was ignoring MFDRA and through inaction would allow MFDRA to lapse. Here we are a year later and congressional behavior seems even worse. Does this mean our senators and representatives will cooperate and extend MFDRA again like they did last year? Hope springs eternal.
D K.
Mechanicsville, MD  |  June 17, 2013
I have been attempting to sell my home, in Maryland, through a Short Sale. My mortgage lender has offered me a "deed in lieu." Will I still qualify for the Mortgage Relief Act which was extended through 2013, assuming the paperwork is complete prior to December 31st? Thank you.
June 17, 2013
Review the terms of the contract your home loan lender offers you. Will it be forgiving the deficiency balance and issuing you a 1099-C? If so, then the amount forgiven should be subject to MFDRA. However, if the terms of the contract are vague as to the status of the deficiency balance, then you are leaving yourself open to the lender seeking to collect the deficiency balance from you.

Consult with a Maryland lawyer who has experience negotiating with mortgage lenders if the contract's terms and conditions are vague or confusing.
Kevin H.
Phoenix, AZ  |  January 02, 2013
Make sure you share with Arizona homeowners that the MFDRA had little impact on Arizona residents. There are many homeowners who may not fit into the MFDRA and still may not have cancellation of debt tax liability in a short sale. Check out the article Why The Mortgage Debt Forgiveness Act Rarely Applies To Arizona Homeowners to learn more.
January 03, 2013
Thank you for sharing the link to the thoughtful article, Kevin. From my reading, Arizona homeowners with purchase loans should verify whether they have a non-recourse loan. Many of them will not be affected by the extension of the MFDRA.

However, Arizona borrowers who refinanced their purchase loans could benefit from the extension.
Karen D.
Colorado Springs, CO  |  December 22, 2012
I am considering a Deed in Lieu of Forclosure on a commerial property in Florida instead of forclosure. I (not a bank) hold the mortgage. The owner is way behind on payments to me as well as property taxes and is considering filing bankruptcy. Is this a good option? Will he be liable for taxes? Any other considerations?
December 22, 2012
If I understand the facts you shared correctly, you are the lender for a Florida commercial property, and the borrower is hopelessly delinquent. The borrower confided with you his or her idea of filing bankruptcy, and you want to know if a deed in lieu of foreclosure is a good idea. It is clear you are the lender, but it is unclear if your loan is secured by the commercial property. Let's tackle the easy questions first.

First, you ask this question on a page discussing the Mortgage Forgiveness Debt Relief Act, which does not apply to the borrower here because you mentioned the property is commercial. The Mortgage Forgiveness Debt Relief Act applies to residential property, and not commercial. Second, unless Congress and the President act, the Mortgage Forgiveness Debt Relief Act will expire at the end of 2012.

You asked about the borrower's tax liability. I see two tax issues here. First, the unpaid property taxes are significant because if the borrower does not pay the property taxes, the county may file a tax lien or even foreclose to collect the amount due. Should it foreclose and you not take action, it could evict any tenant and auction the property, subject to any other encumbrances on the property, such as your mortgage. The second tax issue is also tricky. I will assume you as the lender are not in the business of lending money — you are not a banker. If so, you are not required to issue the borrower a 1099-C. However, I confess I do not know if you are allowed to issue a 1099-C. Consult with a tax lawyer to learn more about the tax implications for you if you are allowed to issue the borrower a 1099-C.

Finally, your hardest question — is a deed in lieu of foreclosure a smart choice for you. This is impossible to answer without knowing more about your financial circumstances and what an outsider can know about the borrower's finances. If he or she files for bankruptcy, you and all of his or her other creditors are subject to the decisions of the debtor's bankruptcy trustee. If you and the borrower agree to a deed-in-lieu-of-foreclosure, the borrower may not need to file for bankruptcy, and you might be able to work out a better deal than the bankruptcy court dictates.

Consult with a lawyer in Florida who has real property or contract law experience to learn more about your rights, liabilities, and options.
Joann C.
Burlington, VT  |  April 13, 2012
Have a home in foreclosure in the state of Vermont and am awaiting my first hearing after the mediation was unsuccessful. I have been renting the home and living in a different state since 4/2008, with only short stays at the property since. My rental income has been reported each year since. I defaulted on the loan in Oct 2008 and have applied for several loan mods which were denied. Now I'm in way too far over my head and am looking at a default of almost $100,000 due to the long, drawn out process. My current loan was a refi to consolidate debt and pay for some house repairs (no receipts). I believe there could be a problem with the deed and did ask for proof of ownership on the banks part in my answer to the court. I am currently not represented by a lawyer.

I defaulted due to a disability and have been receiving SSDI as of mid 2010. I have made a minor amount of rental income in the years prior and owed no income tax. My question is - am I running a risk of tax liability if I do not have this settled by the end of this year? Will my deficiency be taxed by the IRS if I am disabled? Is there any other option to avoid a deficiency other than a short sale? I am concerned about a short sale due to the chain of transfers and MERS recorded deed. Thanks!
April 16, 2012
The Mortgage Forgiveness Debt Relief Act is a wonderful law that helped soften the blow of foreclosure. However, it is not the only tool available to people should Congress fail to act and extend MFDRA. See the Bills.com resource Cancellation of Debt Income to learn about CODI, which might help you.

Congress has a handful of laws to help people with disabilities. For example, there is a tax deduction available for the blind. I know of no law giving a waiver for loan forgiveness, or altering mortgage-related taxes for disabled people. Readers, please offer your reference to these types of laws by clicking on the Reply button below and share what you know.
Michelle N.
McLean, VA  |  April 13, 2012
I foreclosed on a property in April of 2010 it was my primary residence at the time. GMAC that year sent me a 1099 A and they have repeatedly told me that they do not pursue a difficulty which i don't even know if there was one per the 1099 the fair market value was more than what i owed but i am not sure what they sold it for. Should I be worried that they did not send me a 1099 C? I have asked for some sort of letter stating that the account is closed but i have had no luck except for a verbal notification from various reps that the account is closed and that I owe nothing and that GMAC will not now nor in the future pursue any kind of deficiency. They have told me to call the law office that i guess drafted paperwork on the foreclosure, which i have and they say that the case is closed on my property and any kind of letter would have to come from GMAC...I do plan on buying again when I can and I just don't want this lingering over me that some day I can have a lien put on my house or be sued by GMAC?

I also had a second mortgage with Chase I am settling with them now. I will be submitting payment to them this week to close my account and to have no further debt obligation with them. Does the 2nd mortgage that i had fall under the debt relief Act or is it only for the senior loan which would be GMAC. Chase has discharged about $27,000 that i would have owed and now i am not sure if i will have to pay taxes on that difference. Any advice would be very much appreciated.
April 13, 2012
You have two issues regarding the senior, GMAC deficiency balance.
  1. Can GMAC file an action to collect the deficiency balance? In other words, what is the statute of limitations for a deficiency balance in the state where the property was situated? Consult with a lawyer in the state where you owned the property to get an answer to that question. Tell him or her about the spoken statements GMAC people told you.
  2. The 1099-A for the deficiency balance, which was never followed-up by a 1099-C notice of cancellation. Talk to a tax lawyer to learn if there are any implications for receiving an A and no C.

Regarding the Chase junior, I cannot answer your question without knowing more about the nature of this loan. The Mortgage Forgiveness Debt Relief Act applies to "forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes." Did you use your second mortgage to "buy, build or substantially improve your principal residence"? If yes, then the Act applies. If it was home equity loan used to consolidate debt (for example), then the Act does not apply.

Dennis S.
Royal Oak, MI  |  April 04, 2012
We've been offered a mortgage modification by GMAC with a significant reduction of the unpaid balance. I understand that the forgiven principal is considered taxable income unless, among other things, the mortgage is for a principal residence (IRS Form 982). What if the mortgage was taken out for a principal residence, but because of the housing crisis, have been unable to sell our home, rented it out and relocated. Because it was our principal residence when took out the mortgage, can we qualify to claim this exemption on Form 982, even though we now live elsewhere?
April 04, 2012
We do not know what standard the IRS uses to determine residency for the purposes of the Mortgage Forgiveness Debt Relief Act. One argument we have read online is the IRS should use the same standard for residency when determining any capital gains taxes owed:
"if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its sale,"
However, that is an argument and not a statement issued by the IRS. Your best source of information is a tax lawyer who has experience with mortgage issues. I realize my answer is not what you hoped for. However, I would rather give you a non-answer than one based on speculation.
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