Answers to Frequently asked Questions regarding tax relief under the Mortgage Protection Debt Relief Act of 2007

Congress has provided some tax relief from relief from indebtedness income to homeowners under the Mortgage Forgiveness Debt Relief Act of 2007.

Here are the answers to several common questions regarding the relief available through this Act:

What relief does the new law provide? Generally, it excludes tax on cancellation-of-debt income realized from a foreclosure, short sale, or other mortgage restructuring.

What kind of debt qualifies for this relief? This debt relief only applies to recourse debt -debt for which you are personally liable. This tax break only applies to debt used to buy, build, or improve your principal residence. It isn't available for vacation homes or investment property.

Is there a limit? Yes. The exclusion can cover the tax due on up to $2 million of forgiven debt. ($1 million if you're married and file separate tax returns). Any excess is taxable under the general rules.

How does the exclusion affect your basis in the home? You must reduce your basis (the amount used to determine taxable gain or loss from a home sale) by the amount of cancelled debt excluded from taxable income. For example, if a loan restructuring results in cancellation of $50,000 of debt on a home with a basis of $450,000, your basis is reduced to $400,000. This could increase your taxable gain when you sell the home, although the first $250,000 of gain ($500,000 for joint filers) may still be sheltered by the home sale exclusion.

How do I know how much debt is excluded? Your lender will send you Form 1099-C (Cancellation of Debt) showing the amount of debt forgiven and the fair market value of property given up through foreclosure. It also sends the IRS a copy of the form. You should review this information very carefully as the amount of debt forgiven is determined from the fair market value of the home, which, as determined by the lender may or may not be accurate.

Is the new tax relief permanent? No. Initially, the tax exclusion only applied to debt forgiven in 2007, 2008, or 2009. But subsequent legislation has extended this tax break through December 31, 2014. For California, the exclusion is only in effect for transactions occurring prior to January 1, 2013.

This is just a brief overview of the new mortgage debt relief available to homeowners. Now is the time to contact the Law Offices of Elliott Abrams for a consultation.