Cash Flow Planning for Life - Helping you reach your personal & professional financial goals.

Cash Flow Planning for Life

Helping you reach your personal & professional financial goals.

#2 – Mortgage Debt Relief Act of 2007

Posted by Mark On March 3rd

Mortgage Debt Relief Act of 2007

This is the second tip in our series 7 Things You Should Know About the Tax Consequences of Debt Forgiveness which is also available as a free eBook from your Naples Accounting Firm.

A foreclosure or short sale of your home can be a double edged sword. Not only do you lose your home, but then you may have to pay taxes on the forgiven debt amount. Talk about ‘beating a dead horse’ right?

In recent years, with the rise of short-sales and foreclosures, the Mortgage Debt Relief Act of 2007 was passed to help homeowners who have found themselves in this predicament.

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows the taxpayer to exclude income relief as a result of mortgage modification or foreclosure on their qualified principle residence.

However, to receive this exclusion, the debt must have been secured by the residence and used to buy, build or substantially improve the residence. The following does not qualify for the exclusion under the Act.

Debt forgiven on:

  • Credit cards
  • Auto loans
  • 2nd homes
  • Rental property

The maximum exclusion under the Mortgage Forgiveness Debt Relief Act is $2 million ($1 million for a married person filing separately). You will need to complete Form 982 and attach it to your tax return (Form 1040) for the year debt was forgiven.

You should also review any home equity lines of credit that were forgiven. The interest on $100,000 may be deductible for income tax purposes, however, any debt forgiven (used to pay off credit cards or buy a car) can not be excluded under 7 Things You Should Know About the Tax Consequences of Debt Forgivenessthis act. Also, if the qualified principle residence was refinanced, and if those proceeds were not used to improve the principle residence, that amount above the refinanced loan also cannot be excluded under the Mortgage Forgiveness Debt Relief Act.

If you have further questions about mortgage debt relief, please contact us online, call (239) 384-9688, or download our FREE eBook 7 Things You Should Know About the Tax Consequences of Debt Forgiveness. When it’s time for us to meet, here is a good way for you to prepare before meeting with your tax planner.

-Mark

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This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.

LEGAL NOTICE AND DISCLAIMER: The information within this post is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.

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