Late December 20 of 2007, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, which freed taxpayers from having to pay tax on mortgage debt that was forgiven. The fact that debt forgiveness normally resulted in taxable income had made home sellers reluctant to go through short sales and willing to brave foreclosures.
Now, homeowners may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing separately. Details can be found in the revised IRS Form 982. The Form 982 should be filled out and attached to the 2007 federal income tax return.
This new law applies to mortgage debt forgiven in 2007, 2008 or 2009, and covers not just mortgage debt forgiven in a foreclosure, but also in a mortgage restructuring. This debt, however, must have been used to buy, build or substantially improve the homeowner’s principal residence and must have been secured by that property. Debt used to refinance qualifying debt is likewise eligible for the exclusion, but only up to the amount of the old loan principal, prior to the refinancing.
What kind of mortgage debt does not qualify? Examples are debt on second homes, rental property, investment property, business property.
Since the new law was enacted late December, most tax preparation softwares may not have the revised Form 982. I suggest you check with your software publisher for updates.
Oh, one other important point. This law applies to federal income tax, not to state income tax. As of today, Californians do not have a similar mortgage forgiveness debt relief act yet, but we probably will have one early March. Senate Bill (SB) 1055, authored by Sen. Michael J. Machado, recently passed the Senate Revenue and Taxation Committee on an 8-0 vote and is now before the full Senate.
A good point about tax software programs not having this recent update. Informative post!
Comment by Lake Blue Ridge Georgia Real Estate — February 29, 2008 @ 9:58 am