After the 2007 and 2008 mortgage crunch, many mortgagers found themselves with mortgage loans that were way above the market price of their houses. Many of these homeowners could not support their mortgage payments and this lead to foreclosures and mortgage adjustments. In a bid to shield mortgagers from a double loss, many financial institutions cancelled the mortgage debt that was above the sales price in the case of a foreclosure or the debt that was above the market price of a house in the case of a mortgage adjustment.
If a taxpayer is forgiven a debt, the IRS considers the forgiven debt an income and requires the taxpayer to pay income tax for the forgiven debt. However, under the Mortgage Debt Forgiveness Tax Deduction, a taxpayer gets a relief from paying tax against the cancelled mortgage debt. Below are some of the requirements for qualifying for this relief:
- Form 1099C – Homeowners who get part or the whole of their mortgage loan cancelled will receive a Form 1099C from mortgage financier. This form includes details of the original mortgage, the amount paid, the amount forgiven, and the market price of the house. This form is the support document for claiming the Mortgage Debt Forgiveness tax deduction.
- Mortgage Forgiveness between 2007 and 2012 – For you to qualify for the Mortgage Loan Forgiveness deduction, one needs to have received the deduction between 2007 and 2012. The Form 1099C that details the forgiven debt needs to have been sent within this time to qualify for the deduction.
- Mortgage Restructure and Foreclosure – The Mortgage Debt Forgiveness Relief is available both to people who receive the debt forgiveness after a foreclosure and to those who get part of their debt cancelled in a refinancing.
- Principal Residence Only – The Debt Forgiveness Relief is only available for people who receive forgiveness on their principal residence only. It cannot be used to claim deduction for forgiveness of mortgage for a second home or a rental.
- Forgiveness Limits – The maximum amount of mortgage relief that one can deduct is $2 million. Married individuals who file separately can claim a maximum of $1 million. If the mortgage debt forgiven exceeds these limits, the taxpayer claims relief for the maximum and pays tax on the amount beyond the stipulated thresholds.
- Refinancing Qualifications – Forgiven mortgage refinancing loans can also be deducted under this tax relief. However, for a mortgage refinancing loan, the loan must have been used to significantly improve the house under mortgage. If a taxpayer is forgiven a mortgage refinancing debt used for other purposes such as credit card consolidation, such a cancelled debt cannot be deducted under the Mortgage Forgiveness Debt Relief
- Form 982 – To apply for the Mortgage Debt Forgiveness Relief, one needs to file Form 982, Reduction of Tax Attribute Due to Discharge of indebtedness Form providing details of the forgiven debt. The form is available on the IRS website.