Mortgage Debt Relief: How can you benefit from this?

The Mortgage Debt Relief Act of 2007, enacted on December20

, 2007, allows the income realized as a result of modified terms of mortgage or foreclosure on your principal residence to be excluded. It allows tax payers to exclude what they earn after their debts have been discharged on their principal residence. Forgiven mortgage debts and reduced debts from mortgage restructuring qualify for such exclusions.

Normally, when you borrow money from a lender who later cancels or forgives your debt, you may have to show this canceled amount as part of your income for tax reasons. The lender s also required to usually report the canceled amount on a Form 1099-C which is the cancellation of debt.

When is income excluded according to the Mortgage Debt Relief Act of 2007?

Normally if a lender forgives or cancels a debt, it must be included as taxable income. However, according to the Mortgage Debt Relief Act of 2007 allows exclusion of certain canceled debt on your principal residence as income. The Act applies only to canceled debts or forgiven debts that are used to buy, build or improve your residence or to refinance debts that may be incurred to serve the purpose.

Debts that have been used to refinance your home also qualify for this tax exclusion. But such debts may be excluded only to the extent the principal balance of the earlier mortgage amount before the refinancing was done, would have qualified. The exclusions according to Mortgage Debt Relief Act of 2007 apply from 2007 through 2012.

How would you apply for exclusions?

Once your lender forgives a debt or cancels it, you must report it through Form 982 and attach it along with your tax return. Your lender must send a Form 1099-C where the amount of debt canceled must be mentioned. This information you will need when you fill out Form 982. Remember that you cannot exclude any debts forgiven on your second home; it has to be a debt on your primary home.

Mortgage Debt Relief: How can you benefit from this?

By: Jessica Bennet

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