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Friday, September 9, 2011

What happens when my home forecloses?

With the Mortgage Forgiveness Debt Relief Act of 2007 you are able to exclude income due to foreclosure or mortgage restructuring.

The Act is valid on discharged debt on their primary residence (not on a second home or vacation home) from 2007 through 2012. Up to $2 million or $1 million if you are married, filing separately, is eligible for forgiveness through this Act. Note that your lender by law is usually required to submit a form (Form 1099-C) noting the forgiveness of the debt you previously owed (if the forgiven loan is over $600).

To put it simply, the remainder or balance of your debt is generally taxable income for your tax return. If the original loan was $200,000 and you have paid back $100,000 to date, if the lender is not able to collect the remaining balance $100,000 can be considered taxable income.

There are exceptions to this Act and your professional tax preparer is able to evaluate your individual circumstances and judge whether or not this rule can apply to you. For example, if you file bankruptcy or insolvency this Act will not apply to you.

If you are able to exclude forgiven debt from your income, you must complete and attach form 982 with your tax return. Your tax preparer is qualified to fill this form properly on your behalf.

Please give me a call if you would like assistance or click here: Granada Hills Accounting, we can help.

You can read the Mortgage Forgiveness Debt Relief Act in full on the IRS website here. (Link = http://www.irs.gov/individuals/article/0,,id=179414,00.html)

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