The Pending Expiration of the Mortgage Forgiveness Debt Relief Act Posted by Ted C. Jones on May 16, 2012
The clock is ticking for individuals either facing foreclosure or that are underwater and desire to complete a short sale of their primary dwelling, in regards to any debt forgiveness. What may not be a taxable event in 2012, might become imputed ordinary income in 2013 (assuming Congress does not extend some previous legislation). If you are contemplating either completing a short sale or being foreclosed on, make certain to have these completed by year end or you will potentially owe ordinary income tax in 2013 on the same transaction. Time is quickly expiring. When you owe a debt to someone and the obligation to repay that debt is either canceled or forgiven, you may owe standard income tax on that amount—i.e. the forgiven debt is considered imputed ordinary income by the IRS in most circumstance. One of several exceptions, at least from January 1, 2007 through December 31, 2012, is debt forgiven on your primary dwelling–an exclusion created by the Mortgage Forgiveness Debt Relief Act (The Act). When a debt repayment is canceled, the lender in most circumstances is required to report that amount to the borrower and the IRS—with the borrower receiving a From 1099-C (cancelation of debt).
In late 2007, Congress passed The Act, which details the following circumstances under which no income tax liabilities may be due for debt relief on your primary dwelling:
- Debt must have been used to buy, build or improve your primary dwelling, or the debt could also be a refinance of the prior. If the debt was a cash-out refinance not used to improve or purchase the property, it would not qualify under The Act
- The debt must be forgiven between January 1, 2007 and December 31, 2012 • Only primary dwellings qualify—not second homes, cars, credit cards, student debt…..
- A married couple filing jointly can qualify for up to $2 million of debt forgiveness on their primary dwelling while a single person or a married person filing separately qualifies for up to $1 million at the loan was forgiven.
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