Posted by admin on January 30, 2010
There has been a small change in the tax code for a temporary period because of the mortgage crisis hitting the entire country.
The change in the tax code is known as “The Mortgage Forgiveness Debt Relief Act of 2007”. As per the new changes, in certain circumstances, the homeowner does not need to pay federal income tax on debt forgiven on a loan secured by a qualified principal residence via a short sale, foreclosure, deed in lieu, loan workout or short refinance. A short finance is defined as the term where the loan amount is reduced and forgiven in order for the homeowner to keep the property.
This change in the laws has been great news for the homeowner. If you had any remaining balance in the prior years, it was considered as an income for which you would owe taxes.
Under the new laws, a homeowner does not have to pay any federal income tax due on the forgiven debt that is secured by the seller’s principal residence, provided that the loan was made to acquire, construct, or substantially improve the principal residence. A short refinance of that type of loan will also qualify for the exemption.
If you have borrowed money out of your house to pay for a vacation and got debt relief on that loan, you will have to pay income tax. The exemption on the federal income tax applies to any portion of loan debt forgiven during the period January 1, 2007 through December 31, 2009. Therefore, it does not make any difference when the loan was taken. What matters is when a portion of the debt is forgiven.
IRS Income taxes on debt relief due to any kind of foreclosure is not automatic. You have to file IRS form 982 “Reduction of Tax Attributes Due to Discharge of Indebtedness” and the form has to be submitted to the federal tax return. There are many people who are actually entitled to this tax break and are not aware of filing the form.