Canceled or forgiven debt usually creates taxable income. When your mortgage lender cancels or forgives your debt, the Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude up to $2 million of debt forgiven on your personal residence.
The $2 million includes debt reduced through mortgage restructuring, foreclosure or through short sale.
The debt must have been used to purchase, build or substantially improve your property. If you refinanced the property to pay off credit cards, vehicles or other uses it does not qualify for the exclusion.
Debt cancelled for credit cards, car loans, rental properties or second homes does not qualify for this act. You may be able to exclude the amount under other areas including insolvency. Insolvency is when you owe more than the value of your assets. Assets also include your 401(k) and retirement account balances.
Your lender is required to issue a 1099 C for the amount of debt cancelled. The lender is supposed to issue the 1099 by January 31st. Unfortunately the lender usually mails it to your last address which is the house you just did the short sale on or the lender foreclosed on. As long as the lender can show they mailed the form they have met their legal requirements.
More questions call KatTax at 702-796-1040 and we can help you determine if you will owe any taxes.
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