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The Mortgage Debt Relief Act Due to Expire — Provision to Extend
The Mortgage Debt Relief Act of 2007 is due to expire this year. This could be a devastating blow to many homeowners. MDRA is a federal tax law which allows qualified taxpayers to exclude from taxation, income derived from the forgiveness or discharge of debt associated with a mortgage on a principle residence.
The administration’s 2013 national budget proposal includes a provision to extend this act through 2014 and perhaps beyond.
The Mortgage Debt Relief Act allows struggling homeowners to unload a tax burden under certain circumstances. (See IRS Ten Facts To Mortgage Debt Forgiveness)
- The exclusion applies to up to $2 million ($1 million if married and filing separately) in forgiven debt for calendars years 2007 through 2012, but only if the forgiven debt is related to a decline in the home’s value or the taxpayer’s financial situation.
- The exclusion applies only to the debt on the principal residence. Vacation homes, investment properties and other second homes do not qualify.
- The tax rule can be applied to debt used to refinance your home, provided the principal balance of the old mortgage, immediately before the refinancing, would have qualified.
- Millions of homeowners still face foreclosure and, because many have a mortgage that’s larger than the value of their home, they may be able to have the debt discharged. The tax exemption helps promote short sales and modifications to those homeowners who otherwise would look at the tax on added income as a prohibitive cost.
IRS Tax Tip 2011-44, March 3, 2011
If you are a homeowner whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income.
Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness.
- 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.
- You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
- 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.
- If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
- Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions — such as insolvency — may be applicable. IRS Form 982 provides more details about these provisions.
- If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
- Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
Copyright © 2012 Sandy Gadow. All Rights Reserved. This article may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.