Dec

Who Qualifies for Mortgage Forgiveness?

With more and more short sales in my inventory of listings, I’ve realized that one important question most homeowners have is how the short sale will impact their income tax. When a lender cancels debt, it is considered taxable income to the borrower . This income is reported to the IRS by the lender on Form 1099-C .

H.R. 3648 Mortgage Forgiveness Debt Relief Act of 2007 amends the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income. It applies to debt forgiven in the calendar years 2007 through 2012 through foreclosure, short sales or deed-in-lieu of foreclosure. Here are a few of the main qualifiers that allow the taxpayer to exclude forgiven debt from their taxable income:

Must be on their principal residence with a loan balance of less than $2 million or $1 million if married and filing separately.
Debt must have been used to buy, build or improve the principal residence
Debt must have been secured by the principal residence.
If you have refinanced, the debt is eligible up to the amount of the old mortgage principal balance prior to the refinance.

My advice is this: Do your research. Read and ask questions. Knowledge will empower you and give you the confidence to be proactive. Then, consult an accountant or tax advisor. Share with him what you have learned and ask for his advice.