If your credit card company forgives or cancells your debt partly or in full that results in taxable income. However, mortgage debt has a different set of rules. If mortgage debt is forgiven partly or entirely for tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.
To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
Be sure to bring your 1099C with you when you come to do your taxes.
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