In March of 2009 I entered into a short sale agreement with my lender for a home in Iowa. I lived in the house for a year and a half until a job loss meant moving out of state to live with family in California. After 6 months of trying to sell the house in 2007, I was able to find a renter who stayed just over one year. When they gave notice to vacate, I listed the house again and after several months found a buyer willing to do the short sale. I received a $13,000 notice of forgiveness of debt from the lender 1099C. My wife and I are currently unemployed and will have to dig deep in limited savings to pay the tax on the deficiency. Will the 2007 Mortgage Debt Relief Act help me to forgive tax on the time the home was my principal residence. I owned the house for a total of 3 years, 3 months of which 1 year 3 months was my principal residence; one year, one month rented and approximately 1 year vacant.
The Mortgage Forgiveness Debt Relief Act of 2007 provides tax relief for some mortgage loans forgiven in 2007 through 2012. See the IRS document "The Mortgage Forgiveness Debt Relief Act and Debt Cancellation" for more information.
In summary, the Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence. It includes the cancellation of the complete debt, or 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 doesn't 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.
Based on the facts you provided, you qualify for the Mortgage Forgiveness Debt Relief Act if the home is your principal residence and the reason for the renegotiation was either due to a decline in the property's value or because of a change in your financial condition. If so, be sure to report the canceled/forgiven amount on Form 982, and include that form with your 2009 income tax return.
I encourage you to speak with a certified tax professional or a licensed attorney in your state to find out whether you fit the criteria for the Mortgage Forgiveness Debt Relief Act of 2007.
I hope this information helps you Find. Learn & Save.