Friday, May 8, 2009

Mortgage Debt Forgiveness

Under the current tax law a taxpayer can exclude from gross income any discharge of qualified principal residence indebtedness (see page 104 of IRS Publication 17). The exclusion applies to discharges after 2006 and before 2013. One stipulation is that the basis of the principal residence (the main home) must be reduced (but not below zero) by the amount excluded from gross income.

This represents a significant degree of help for someone who has lost their home due to the recent and ongoing economic turmoil in our country. Prior to the introduction of this law a lender who discharged a mortgage debt would send the homeowner a 1099-C, Cancellation of Debt form, in the amount of debt charged off. The taxpayer would then have to claim this as income and would have to pay taxes on it!

The law is very tricky however. There are many instances where a discharged mortgage debt can be charged to the homeowner as income, such as a second home, investment property, etc. Therefore if confronted with a 1099-C, Cancellation of Debt notice it would be wise to have this reviewed by a tax professional.

6 comments:

Raj said...

There are certainly a lot of details like that to take into consideration. That’s a great point to bring up.

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darrell said...
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darrell said...
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Jensen said...

What a great post, I actually found it very thought provoking, you just never know sometimes when a golden nugget of information is going to land at your feet, thanks

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Jensen said...

A fantastic read….very literate and informative. Many thanks….what theme is this you are using and also, where is your RSS button ?

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Anderson said...

Thanks for posting, definitely going to subscribe! See you on my reader.

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