Do you qualify for a special exemption on canceled mortgage debt this tax season? Whether it was through a loan modification, short sale or foreclosure, the mortgage debt you have been forgiven does not count as taxable income provided it meets two main qualifications.
As reported by the Boston Herald, under the Mortgage Forgiveness Debt Relief Act of 2007 you are exempt from paying taxes on canceled mortgage debt if:
1) The residence in question is your primary home and not a second home or rental
2) The debt forgiven was used to buy, build or improve the residence and not used for an unrelated expense such as college tuition, vacations, new cars or credit card debt
Other details of note, as outlined on the official IRS website, are as follows:
- The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven.
- If you have canceled debt but have not received a 1099-C Cancellation of Debt form, request one. The amount of debt forgiven or canceled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.
- Though not covered under Mortgage Forgiveness Debt Relief Act of 2007, canceled debt on student loans and credit cards may be exempt under different provisions.
For more information refer to Publication 4681 and Form 982, and the official IRS website.