Forgiveness of Indebtedness Income
In accordance with the Internal Revenue Code (I.R.C.) 26 U.S.C. Section 6050P, when a debt in an amount of $600.00 or greater is discharged, it is a taxable gain to the debtor and imposes an obligation of the creditor to file Form 1099-C with the IRS. In other words, if your lender forgives (a/k/a writes-off) a portion of your mortgage loan, you would be taxed on the amount of debt forgiven as ordinary income.
Mortgage Forgiveness Debt Relief Act of 2007
On December 20, 2007, former President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, to help Americans avoid foreclosure by protecting families from higher taxes typically assessed from the forgiveness of indebtedness. This Act will create a three-year window for homeowners to refinance their primary residence and pay no taxes on any debt forgiveness that they receive. Under current law, only primary residences qualify for the protection and if your lender forgives a portion of your mortgage, the tax code treats the amount forgiven as income that can be taxed.
This provision is currently effective through December 31, 2013. This provision adds new IRC section 108(a)(1)(E), pursuant to which the discharge of qualified principal residence indebtedness is excluded from gross income. For purposes of the exclusion, qualified principal residence indebtedness is acquisition indebtedness (to buy, build or improve the residence) up to $2 million ($1 million for Married Filing Separately). The home must be owned and used as a principal residence (within the meaning of section 121).
What about Non-Primary Residence?
At DHR we meet with and counsel many clients who have non-primary residence real estate either in the form of investment or trade/business property. While there may be certain options available pursuant to the IRC regarding these types of properties, it cannot be stressed enough that YOU MUST CONSULT WITH YOUR CPA/TAX ADVISOR. Each situation is different and unique and the failure to obtain a thorough analysis of your specific tax situation could result in significant tax consequences.