Gary Bode, CPA: Remember there are other ways, like IRS defined insolvency, to avoid declaring Cancelled Debt as taxable income. Call us for a free initial consult at 399-2705.
If your mortgage debt is partially or totally forgiven, say with loan re-structuring or foreclosure, it technically becomes cancelled debt and thus taxable income to the IRS. Ouch, a nasty surprise adding insult to injury. For tax years 2007 – 2012 you may be allowed to exclude up to $1,000,000 (for a taxpayer filing with Single status on Form 1040) of forgiven mortgage debt from your taxable income. This is allowable due to the Mortgage Forgiveness Debt Relief Act of 2007. As with all IRS issues, there are conditions.
Home equity loans qualify under the Mortgage Forgiveness Debt Relief Act of 2007, too, but there are provisions. The proceeds of the loan must have been used to build or substantially improve your principal residence and have been secured by that residence. This is important because some folks use 2nd mortgages to pay off credit card debt, buy a car, etc. If so, the Mortgage Forgiveness Debt Relief Act of 2007 doesn’t apply. But remember you may still be able to exclude the cancelled debt from your taxable income to the extent that insolvency existed at the time the debt was cancelled. There are potentially tricky calculations to be made in these cases. Form 982 needs to be filed with your tax return.
As with Cancelled Debt, mortgage debt forgiveness is reported by your financial institution to both you and the IRS on Form 1099-C. It shows the amount of mortgage debt forgiven, and the Fair Market Value of the property, if foreclosed. So check Form 1099-C carefully, because the IRS accepts these figures as fact.
Per the IRS: debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for this tax relief under the Mortgage Forgiveness Debt Relief Act of 2007. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. Please see our postings on Cancelled Debt for more details. If your tax preparation shows some cancelled debt is not taxable, this may trigger IRS attention. Good documentation is prudent.
Although we’re a Wilmington NC CPA firm, we handle clients from a broad geographical base. With email, phones, Skype, etc., we may be able to offer you services even if you aren’t lucky enough to live in Wilmington NC (wink). We offer a free initial phone consult with a CPA tax accountant well versed in all types of tax preparation, including Cancelled Debt, IRS Form 982 and mortgage debt forgiveness. Just give us a call at (910) 399-2705.
Please access any of our posting categories on the left sidebar to get a better feel for our proactive attitude and expertise. Plus, we understand that cancelled debt and insolvency are sensitive issues.
