In 2007, the Mortgage Debt Forgiveness Relief Act was implemented allowing for homeowners to exempt forgiven debts from being taxable as income. This bill is set to expire at the end of 2012, which could pose some problems for future homeowners. However, there are a few ways to ensure that the possible expiration of the bill does not have any unforeseen consequences.
Expect The Unexpected
There is no guarantee that this bill will be extended past its current term. It is important that anyone experiencing mortgage debt troubles, or considering a foreclosure alternative such as a short sale, be prepared for what could happen at the end of the transaction. Anyone pursuing a mortgage debt solution that includes a mortgage debt forgiveness, or deficiency balance waiver, should expect that this amount must be claimed at tax time.
Prepare The Documents
The lender will provide a few documents that are essential for preparing to claim forgiven debts on tax returns. The first is the lender’s notification, or letter, of debt cancellation. This letter is given to the borrower as written proof of the cancellation of debt. Next, a 1099-C form will be required by the IRS. The 1099-C (Cancellation of Debt) form may be obtain from the lender. The borrower will need to include these two documents in addition to filing IRS Form 982, when reporting their taxes for the year.
In some cases, claiming a cancellation of debt for mortgage troubles can push a debtor into owing taxes. While this isn’t always the case, there are instances in which borrowers end up in tax debt over mortgage forgiveness transactions. In such cases, it is important to stay in contact with the IRS about any tax debts and attempt to resolve them before they become delinquent. Anyone expecting to owe the IRS money that is experiencing a financial hardship should negotiate a payment plan as soon as possible to avoid IRS penalties.