David Bauman, Enrolled Agent
We’ve all seen the bleak economic news headlines of late. The troubled mortgage and housing industry has been in the news on an almost daily basis for months. The number of homes foreclosed on in the last quarter was at an all time high. In an effort to provide homeowners some relief, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007.
This is truly a lifesaver for taxpayers. Normally, forgiveness of debt results in taxable income. This act allows taxpayers to exclude qualified mortgage debt forgiven on their principal residence when it comes time to file their tax return.
Qualified debt includes debt reduced through mortgage restructuring as well as debt forgiven due to a foreclosure. According to the IRS, the debt could have been used to buy, build, or to substantially improve the taxpayer’s residence. In addition, debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before refinancing. This special relief is not available for credit cards, car loans, second homes, rental property or business property and applies to debt forgiven in 2007 and through 2009.
Homeowners whose debt has been reduced or eliminated will receive a Form 1099-C from their lender. The lender must show the amount of debt forgiven and the fair market value of any property given up through foreclosure. (Be aware! In addition to claiming the amount of relief and the amount of debt forgiven on Form 982, you must also move down to line 10b and show the amount of relief as a reduction to your cost basis of the asset affected.)
Taxpayers can claim this relief by filing the newly revised Form 982 and attaching it to their 2007 federal income tax return. You can find the details on how to claim this relief on Form 982 and the instructions are on the IRS website at http://www.irs.gov/pub/irs-pdf/f982.pdf.
David Bauman is an Enrolled Agent with more than 20 years of tax preparation experience, 15 years as a self-employed tax practitioner and five as a Tax Manager for 1st Nationwide Bank. He also has 10 years of tax representation under his belt. He has been with JK Harris since 2002.
