The Mortgage Forgiveness Debt Relief Act:
If you’re forced into a short sale, you’ll still get a 1099C from your lender, and you’ll still have to file that with your taxes. Now, however, you’re allowed to exclude the forgiven amount up to $2 million ($1 million if you’re married, filing separately) from your taxable income. In other words, while it’s still counted as income, you won’t have to pay taxes on that amount of your income.
Who Qualifies for the Mortgage Forgiveness Debt Relief Exclusion?
According to the IRS, you’ll qualify for this tax exclusion whether you mortgage debt is forgiven as part of a refinancing or if it’s forgiven in connection with a foreclosure. In order to qualify for the exclusion, the following conditions must apply:
- The debt forgiven must be on a mortgage for your principal residence. The principal residence is qualified based on the amount of time that you lived in it over the past five years.
- The mortgage forgiveness must be because of loss of value in your home or because of a forced short sale in connection with a mortgage foreclosure. A forgiveness that is given in return for services performed for the lender is not allowed.
- The debt must be forgiven between January 1, 2007 and January 1, 2010.
- The debt forgiveness must be on the mortgage used to buy your home.
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