This Act was introduced on September 25th, in the year of 2007, to the U.S. Congress. It was signed by president George W. Bush, and put into law on December 20th, in the same year. It offered homeowners that were going to be owing taxes towards their forgiven mortgage debt relief, once they faced foreclosure. This Act was given a three-year extension to those whose debt had been discharged during the years of 2007, 2008, and 2009. After the Emergency Economic Stabilization Act was put into law in the year of 2008, the Mortgage Forgiveness Debt Relief Act was given an extension of three more years, meaning it would not expire until the year of 2012, and would still be covering any debts that were discharged through the year of 2012. This was further extended through January 1st, of the year 2014 in section 202 of the American Taxpayer Relief Act from 2012.
A housing debt which has been forgiven (written off) is seen by the Internal Revenue Service as income, and the mortgage debt that was forgiven would be taxable. This exact thing also applies to loan modifications, where the principal has been reduced and for foreclosures. After the lender has wrote off that debt, they will report that debts amount to the IRS. Homeowners can expect to receive a Form 1099-C which will show the amount of the canceled debt.
Anyone that had a debt canceled, is going to be mailed the form, including everyone who has qualified for an exemption. Also, the form 982 will be required to be filed along with taxes by those who have qualified for an exclusion. Furthermore, the exemption only applies when the debt is related to a primary residence. This Exemption Act does not cover any mortgages on vacation properties, nor on any rental properties. Any homeowner that took a cash-out refinance and did not use it to fix their home may find themselves still having to pay back the forgiven debt.
Although, since the signing of the Mortgage Forgiveness Act, there have been amendments made removing this kind of tax liability, allowing the lender and borrower to be able to work together to come up with a solution that is beneficial for both parties. However, this only applies to primary residences and does not give any relief to rental properties. To be certain on whether or not a borrower qualifies one would need to consult with a tax advisor. The total amount for forgiven mortgage debt that can be excluded from one’s income tax has a limit of $2 million dollars yearly.
What does “Cancellation of a debt mean?”
This simply means that if a lender forgives, terminates or cancels the amount you still owe on a loan that you will be liable to file an income tax return on that forgiven debt, depending on the corresponding situations: At the time of the original loan, it was not considered as income.