DebtHelp.com, One site, one solution

Will I Owe Taxes If My Mortgage Debt Is Forgiven?

Created: On October 8, 2009 @ 6:05 pm In

Many Americans have turned to debt settlement to get their bills under control. But before attempting to settle your credit card debt and other loans, make sure you understand how your taxes will be affected.

Debt Reduction and Foreclosure

In many cases if you have a debt canceled or forgiven, you may owe taxes on the canceled amount. But if you have mortgage debt discharged on your principal residence, you should be able to exclude the amount from your taxes thanks to the Mortgage Forgiveness Debt Relief Act of 2007. 

The act applies to [1] debt reduction through mortgage restructuring or debt forgiven in a foreclosure from 2007 through 2012. You can exclude up to $2 million of forgiven debt, or $1 million if you are married filing separately.

Help with Debt and Taxes

If you get help with debt used to refinance your home, the forgiven amount can be excluded to the extent that the principal on your old mortgage would have qualified. You must report any forgiven debt on Form 982 when filing your federal income tax return. Your mortgage lender will send a Form 1099-C that shows the amount of debt that was forgiven.

Credit Card Debt Is Not Excluded

Not all debt that is forgiven gets excluded on your tax return. Credit card debt, car loans, and debt on a vacation home that is forgiven do not qualify for the exclusion. Also, if you lose money from the sale or foreclosure of your home the loss cannot be claimed on your tax return.

Article printed from DebtHelp.com Blog: http://www.debthelp.com/blog

URL to article: http://www.debthelp.com/blog/2009/10/08/will-i-owe-taxes-if-my-mortgage-debt-is-forgiven/

URLs in this post:
[1] debt reduction : http://www.irs.gov/individuals/article/0,,id=179414,00.html