The Mortgage Forgiveness Debt Relief Act of 2007
The government has been passing stimulus and relief bills at a pace not seen since the Great Depression. The Mortgage Forgiveness Debt Relief Act of 2007 is one bill that nobody can argue with.
The housing market has gone from the highest of highs to the lowest of lows. This massive reversal has resulted in a huge number of foreclosures and short sales. If you’ve experienced either of these situations, there are tax issues you need to be aware of.
Ready to groan? When you are forgiven a debt, the government views it as a form of gain. More specifically, it views it as a taxable gain…as though you received income in one form or another. The government wants tax paid on this gain.
This concept of gain reaches a level of ludicrousness when it comes to losing your home. Yes, you gain the benefit of no longer having a mortgage debt, but that is because you’ve lost your home! Losing one’s home tends to mean you are in a very bad financial position. Given this fact, one has to wonder how the government thinks you are going to come up with the money to pay the taxes on this “gain”.
Fortunately, the government has come to its senses on this issue. The Mortgage Forgiveness Debt Relief Act of 2007 provides homeowners that have lost their home with an exclusion of $1 million for single filers and $2 million for married couples filing jointly.
To qualify for the exclusion, the debt must have been incurred to “buy, build or substantially improve” the home in question. The home must also be your primary residence. Second homes do not qualify. What about refinanced homes? If the debt was used to improve the home, then it qualifies. If the debt was used to buy a new car, cash out credit card debt and so on, it does not qualify.
To claim the mortgage debt forgiveness exclusion, you need to fill out form 982 and file it with your tax return. Also, look for a 1099-C from your lender. Examine it carefully to make sure the figures reported are accurate. If not, contact the lender to get things straightened out.
The merits of many of the moves being made to save the economy are debatable. The Mortgage Forgiveness Debt Relief Act of 2007 is not one of those debatable moves. It is a smart piece of legislation. Imagine, the government actually helping people! What a concept.