IRS Form 982: Avoiding Tax on Debt Relief

Those who are going through foreclosure proceedings or completing short sales on their homes will probably ask their lenders to cancel or forgive the debt owed that can't be repaid through the sale of the home. By now, most homeowners are aware that income realized by the cancelation, forgiveness, or modification of a mortgage is not considered taxable, thanks to the passage in 2007 of the Mortgage Forgiveness Debt Relief Act.

The IRS wants you to be proactive. So while you won't owe tax on mortgage debt settlements concluded in 2007, 2008, or 2009, the income from such transactions isn't automatically excluded from tax. If you don't complete IRS Form 982, then as far as the government is concerned you owe tax on whatever debt relief you get from your mortgage lender.

Not all home loans qualify for tax relief. To qualify for exemption, the debt must have been taken to build, buy, or improve your residence (or refinance mortgages originally incurred for that purpose). For full exclusion, the loan amount must be less than $2 million ($1 million for married filing separately or single taxpayers). Your lender will send you a Form 1099-C, Cancellation of Debt, with the amount forgiven or canceled entered in Box 2.

There are other ways to get tax debt relief. Canceled or forgiven equity lines taken to pay credit cards, buy cars, or pay other bills do not qualify for exclusion under the Mortgage Forgiveness Debt Relief Act; however, if you are insolvent (liabilities exceeding assets), going through Chapter 11 bankruptcy, or the debt qualifies as farm or business indebtedness, you can still exclude it from taxable income. Check with a tax accountant, enrolled agent, or tax attorney for help with this.

Electronic filers may have to wait. Keep in mind that tax software has not yet incorporated this requirement--you may not be able to file electronically until the IRS updates its systems, expected to happen on March 3, 2008. By filling out the form correctly (lines 1e and 2 for a foreclosure or short sale, lines 1e, 2, and 10b for loan modification) you can take advantage of the tax-exempt status of your mortgage debt settlement and avoid tax on your canceled mortgage liens.

The government has thrown troubled homeowners a bone for 2007 through 2009. Don't miss out on the chance to exclude mortgage debt relief from taxable income. By completing all applicable forms (checking with a tax attorney or accountant if necessary), you can save yourself some money and get a little tax relief.

Debt consolidation comes in many different forms, and we can assist you in finding your best course of action. Start here to find a debt relief option that is fast and secure.



Source:
IRS

About the Author:
Gina Pogol writes about taxes, finance, and mortgages for an online media company. She earned a BS in Financial Management from the University of Nevada and formerly worked as a tax accountant for Deloitte and as a paralegal for a tax attorney.