lender will, on occasion, forgive some portion of
a borrower’s debt.
The general tax rule that applies to any
debt forgiveness is that the amount forgiven is
treated as taxable income to the borrower.
Some exceptions to this rule are available,
but, until recently, the borrower was required to
pay tax on the debt forgiven.
A new law enacted in December, 2007
provides relief to troubled borrowers when some
portion of mortgage debt is forgiven.
However, this relief expires on December
31, 2012 and the National Association of Realtors
will be working to obtain an extension throughout
is some general information you need to know about
his law and cancellation of mortgage debt.
Rule for Debt Forgiveness
a lender forgives some or all of an individual’s
debts, the general rule is that the forgiven
amount is treated as ordinary income and the
borrower must pay tax on the forgiven amount.
Exceptions apply for bankruptcy, insolvency
and certain other situations, including mortgage
Law for Mortgage Debt
(January 1, 2007 through December 31, 2012)
A borrower can be excused from paying tax
on forgiven mortgage debt.
The debt must be secured by a principal
residence and the total amount of the outstanding
obligation may not exceed the original mortgage
amount plus the cost of any improvements.
the relief apply only to a sale?
The provision has broader application.
Lenders might forgive some portion of
mortgage debt in a short sale (when value at sale
is less that the amount owed) or in a foreclosure
where the debt is wiped out.
In addition, if a borrower still living in
the home is able to make an arrangement with a
lender that reduces the principal balance of a
mortgage the amount forgiven in the workout will
not be taxed.
the homeowners in a short sale or foreclosure
claim a loss?
The loss is considered a personal loss and
is, therefore ineligible for either capital loss
or ordinary loss treatment.
happens to the seller when mortgage debt is
Until January 2, 2013, the
homeowner will pay no tax on any forgiven amount.
this provision apply to a refinanced mortgage?
in limited circumstances.
The relief provision can apply to either an
original or a refinanced mortgage.
If the mortgage has been refinanced at any
time, the relief is available only up to the
amount of the original debt (plus the cost of any
Tax relief is generally not available for
second mortgages or home-equity lines of credit
where the funds are not used for home improvement.
Any amount that is not eligible for the
relief provision will be taxed as ordinary income.
does the homeowner get the correct information to
lender is required to provide the homeowner and
the IRS with a Form 1099 reflecting the amount of
the forgiven debt.
The borrower/homeowner must file a Form 982
to reflect the amount forgiven and to show the
reason why the forgiven amount is not taxable.
Any taxable portion of forgiven debt, will
then be reported on the homeowner’s Form 1040
for the tax year in which the debt was forgiven.
if a property declines in value but the owner
stays in the house?
provision would not apply.
The provision applies only at the time of
sale or other disposition or when there is a
workout (reduction of existing debt) with the
all lenders forgive mortgage debt when property
values decline or the home is in foreclosure?
Some states have laws that allow a lender
to require a repayment arrangement, particularly
if the borrower has other assets.
Forgiveness of debt is always at the