Perhaps you've heard of it, not many people have.
The Mortgage Forgiveness Debt Relief Act allows taxpayers to eliminate up to $2 million of mortgage debt on their principal residence in 2007, 2008 or 2009.
Understanding Mortgage Forgiveness Mortgage forgiveness is a familiar term in the real estate market.
When a lender will accept less than the full amount of the debt, in full payment of a mortgage, the difference between the amount payable and the amount accepted is "forgiven".
The Old Rules Enabled IRS to get Their Share of the Pie When a mortgage lender pardons your loan or a portion of it, they send you a 1099C reflecting the debt forgiven.
You must include that amount on the 1099C as taxable income and combine with your earned income and wages.
For example, if $25,000 of your mortgage loan was forgiven, when you filed taxes for that year, that $25,000 must have be added to your earned income.
Add to that the insult of having to pay taxes on income you never saw.
In place of relief, you'd end up owing the IRS a large amount at the next tax term.
The Mortgage Forgiveness Debt Relief Act Turns the Tables Well, not exactly.
If you're forced into a small sale, you will still get a 1099C from your mortgage lender, and you are still required to file that along with your taxes.
However, now you can eliminate the forgiven amount up to $2 million from your taxable income.
In laymen's terms, while it's still counted as income, you won't have to pay taxes on it.
In order to claim this mortgage debt relief, you must show the IRS how much debt was forgiven.
Do not rely on your 1099C to reflect that amount.
Take good notes and contact the lender before tax time to get the documentation you need.