My wife and I purchased a home in 2005. The interest rates shot up out of control and needless to say we lost our home in 2009. We are filing our taxes for 2009. At first when we filed we were told we owned $35,000 to federal and state. I did some research and came across the Mortgage Forgiveness Debt Relief Act of 2007. The problem is we had a duplex. Does the debt relief act of 2007 protect home owners who lived in rental properties they owned? The loan balance was $167,900 and the bank sold the property for $30,600.
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.
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.
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.