Learn More About the Mortgage Forgiveness Debt Relief Act

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READER QUESTION

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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Bills.com Resident Expert
Feb 20, 2012
HIGHLIGHTS
  • Review the tax implications for forgiven debt.
  • Submit IRS Form 982 in a timely manner.
  • Consult with a tax professional, whenever a question of forgiven debt arises.
BILL'S ANSWER

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 cancellation 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.

Best,

Bill

Bills.com

Comments (129)


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Liz M.
Palm Coast, FL  |  February 20, 2012
I sold my house in KY in a short sale and closed January 26, 2011. The company I had my mortgage through, morEquity, went out of business February 1, 2011 and had all of their loans transferred to another company. I have yet to receive a 1099-C for the short sale. I called the mortgage company but all phone numbers have been disconnected. I called the company that took over the mortgage services from MorEquity and they have a record of me but not the mortgage. I called the company that owned my Mortgage company and they said they see my name in their records, but when they click on my county it tells them to contact the new mortgage servicer. So I have now called three places, no one has my records for the short sale, I called the IRS but they tell me they won't get a copy of the 1099's until may or June. I'm not sure what to do. Should i just file with what I have and if the IRS comes back and says they have a 1099-C for me I could file an amendment to my taxes with form 982?
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Bills.com
February 20, 2012
I think your suggestion is a good option. The other options is to file the Form 982 and list the amount forgiven and indicate to the IRS that no 1099-C was received. I advise you to speak with a tax professional, to see which option he or she recommends.
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Bella C.
Lake Orion, MI  |  February 20, 2012
We are in Michigan. Shortsale was approved but 2nd lien holder has recently sold debt and collection agency is trying to collect from sellers. Does the 2nd lien holder not fall under the Obama Debt Relief Act? Seems that none of the banks go without placeing the disclaimer that they may or may not come after you.
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Bills.com
February 22, 2012
I am not sure what you mean by the Obama Debt Relief Act. There was a law passed when President G.W. Bush was in office, the Mortgage Forgiveness Debt Relief Act, that exempted from taxation the amount of debt forgiven on a primary residence from 2007 through 2012, with some restrictions. This only applied to the taxes due, not to the debt itself which could be owed to the lender for the deficiency balance. Depending on your state anti-deficiency laws, you may have liability for the deficiency balance.
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Michael C.
Fort Mitchell, KY  |  February 17, 2012
We sold our home in a short sale in December 2011, now we our filling out our 2011 taxes. We completed all our forms and our credit is being recognized at federal level. However, our state, Kentucky, taxes are showing that we owe a large sum of money. Does the debt forgiveness act apply to Kentucky state income taxes?
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Bills.com
February 17, 2012
The Mortgage Forgiveness Debt Relief Act applies to federal income taxes for residents in all US jurisdictions. One state I know of, California, created a Mortgage Forgiveness Debt Relief Act for California state taxes. I was unable to find any reference to a Kentucky law that creates a Mortgage Forgiveness Debt Relief Act for Kentucky state income taxes. Consult with a tax professional in Kentucky to learn for certain if such a law exists.
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Jay G.
Portland, OR  |  February 10, 2012
My wife and I sold our VA home in a short sale. This home was our primary residence for more than 2 years over a 5 year period, but we did convert it to a rental when we moved out of the area and could not sell the home. We rented the home for a loss for approx. 2 years. Do we qualify for the Mortgage Relief Act?
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Bills.com
February 12, 2012
The IRS regulations apply to your primary (or principal) residence. However, the home may not have to be your primary residence today. It may apply if your home was your primary residence for a certain number of the past five years. Speak with a tax professional about this.
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Nathan C.
Chula Vista, CA  |  February 06, 2012
Is the mortgage forgiveness debt relief also valid in Washington state? We short sold our property there and closed this January 2012. B of A said that the deficiency was waived. We would like to know if this debt relief can help us.
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Bills.com
February 06, 2012
The Mortgage Forgiveness Debt Relief Act is federal and applies to your federal income tax return. Some states, such as California, have corresponding rules that apply to state income taxes. Washington does not have a personal or corporate income tax, so I doubt you must pay state tax on any mortgage forgiveness.
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Mark S.
February 03, 2012
I am curious about the monies I received from Bank of America in regards to its taxability. I received a relocation assistance payment check after settlement of my principal home for $2904. BoA helped themselves to $96 for some obscure charge. (I think they should have not done that.) Anyway, I need to know if this is a taxable event. I have read that it may be taxable. A BoA rep has told me over the phone that they will be sending out 1099s. Does that mean that I must pay income taxes on it?
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Bills.com
February 04, 2012
It is unclear to me that a cash-for-keys payment would be considered income. If it is part of a debt forgiveness, then I can see it would be. If it is considered a payment for cleaning the property before you depart, then again it is income. Readers, please write your arguments below for a cash-for-keys payment not being income.
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Mark J.
Apache Junction, AZ  |  February 06, 2012
Although at the start it might have been called the cash for keys program, it is considered an incentive payment for relocating assistance according to the writings from the Home Affordable Foreclosure alternatives Program. (HAFA) You would think that at a time of need, (my case was due to divorce and gaining child custody, hardly a strategic default), taxing that would be akin to adding insult to injury.
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Tao L.
December 01, 2011
I have a question about the debt forgiven and the income tax liability. Since the mortgage forgiveness debt relief act will expire by the end of 2012, so what is the date of this forgiveness to occur in order to qualify for the tax relief? is that the date of judgement of foreclosure? but at that time, no one knows the amount of the forgiveness yet. Or it is the date of foreclosure sale date? which can be much later, pass the end of 2012, and the relief act will be expired by then. Thanks!
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Bills.com
December 02, 2011
My understanding is that it is the date that the debt is forgiven by the lender. You are correct that, unless the Mortgage Forgiveness Debt Relief Act is extended, any debt forgiven after December 31st, 2012 will not be eligible.

I recommend that you discuss your specific concerns with a tax professional, so you get authoritative answers to questions that can have a serious repercussions.
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Joy A.
December 01, 2011
We would like to file for the Mortgage Forgiveness Debt Relief Act, however our lender will not give us the 1099-c. Our house was foreclosed in Dec 2009. We did receive the 1099-a and filed this with our 2009 tax. will this be enough for us to be eligible to file for the Mortgage Forgiveness? We live in California. Thank You
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Bills.com
December 02, 2011
The lender sent out the 1099-A form informing you of intent abandonment of debt. However, that is not the act of abandonment of debt. This must be done by IRS form 1099-C. The creditor is not required to abandon the debt. It is not clear in which manner you attached the form to your 2009 tax returns. The correct form to use for reporting canceled debt is IRS Form 982. Consult with a certified tax preparer or adviser.
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Diane K.
January 24, 2012
I am very confused also we received a 1099A-also, we did leave the property only after we were informed that it would be foreclosed due to non-payment, we didn't want to be out in the cold. We were very unfamiliar with all of this. We also got a letter before foreclosure stating that we were not legally responsible, but then the property has changed banks several times, and the last bank after sheriffs sale, put a judgment against my husband.
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Bills.com
January 24, 2012
Consult with a lawyer in the state where the foreclosure took place and a tax professional. The lawyer will advise you about legal liability you have, if any, for the deficiency balance and the tax professional about potential tax liabilities. Ask both if you are protected by the Mortgage Forgiveness Debt Relief Act.

Show both the letter you received stating you are not responsible for the debt. Give the 1099-A to the tax professional so it is handled properly on your return. You may also find it helpful to read the Bills.com foreclosure and a 1099-A resource.
Thanks for your feedback!
 
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