Confused by your IRS obligation after foreclosure or short sale?

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Taxes and Foreclosures: Untangling the Mortgage Mess"> : "The Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence. There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for this relief.

This provision applies to debt forgiven from 2007, 2008 or 2009 (extended through 2012 by the recently passed Emergency Economic Stabilization Act of 2008). However, it is important to note that this change only applies to homes used as a principal residence. Debt forgiven on second homes, rental property or business property does not qualify for the new tax-relief provision.

Even though the forgiven debt is excluded from income, the amount of debt forgiven still must be reported (on Form 982). Clients should receive Form 1099-C Cancellation of Debt from their lender, showing the amount of debt forgiven or cancelled.

Issues and Considerations"

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The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). 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. More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17. The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation: What is Cancellation of Debt? If you borrow money from a commercial lender and the lender later cance>>>>>KEEP READING ON IRS.GOV