Debt Forgiveness and Mortgages

Tax Act

Debt Forgiveness and Mortgages

If you had all or part of a mortgage forgiven during the last three tax years, you may be able to avoid paying taxes on the forgiven mortgage debt. A law passed in 2007 called the Mortgage Forgiveness Debt Relief Act allows otherwise taxable mortgage forgiveness to be tax free up to $2 million dollars.

Now if you file separately from your spouse, you can only claim half of the limit yourself. But joint filers can take the full $2 million. Restructure of mortgage debt is one case where you might need this tax benefit in addition to debt that was eliminated through a foreclosure. One exception is debt consolidated from other sources that was originally used for other purposes unrelated to your home.

File IRS Form 982 with your tax return to claim the debt forgiveness. The debt forgiveness is for primary residences only as the Form 982 describes. To find the amounts of debt that was forgiven for the tax year, look for a 1099-C from the mortgage holder. This tax form will provide the total amount information that you need.

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