Homeowners whose mortgage debt is partly or entirely forgiven during the calendar years of 2007 through 2012 are able to claim tax relief by filling out the newly-revised Form 982, filing it with the Internal Revenue Service, and submitting it with their year-end federal tax returns. Normally, when a bank gives a homeowner debt forgiveness it results in taxable income. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude from their taxable income debt forgiven on their principal residence. A homeowner qualifies for this tax exclusion if the balance of their loan is $2 million or less, or $1 million for a married person filing a separate return.
The Tax Form 982 applies to debt reduced through mortgage restructuring, loan modifications, short sales, and foreclosures. Eligible homeowners need only fill out the Form 982 and receive a 1099-C from their lending institution. The debt forgiven by the lending institution must have originated to buy, build or improve the taxpayer’s principal residence and must have been secured by that residence. Debt associated with rental or investment properties, home equity lines of credit, business property, credit cards or car loans do not qualify for the new tax-relief provision.
A homeowner will encounter the Tax Form 982 upon the completion of a mortgage restructuring transaction. This would include but not limited to (1) a successful loan modification with principal reduction, (2) a completed short sale, and (3) a foreclosure sale with remaining deficiency.
If you would like additional information about the Tax Form 982 and its relation to your residential home visit the IRS’ website at www.irs.gov.
James E. Herbe, Esq.