There is no hotter topic this tax season. The mortgage debt forgiveness issue is the bulk of our calls and tax questions this tax season. There is a lot on the line. With that said here are the top tax tips regarding mortgage debt forgiveness.

Internal Revenue Service and the Mortgage Debt Forgiveness

Canceled debt is normally taxable to you, but there are exceptions to the rules.

One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.

1. 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.

2. The limit  for mortgage forgiveness is $1 million for a married person filing a separate return.

3. You can also exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. For a taxpayers to qualify the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes  for example, to pay off credit card debt do not qualify for the exclusion. Check the list to make sure your debt qualifies or call us today.

7. If you can 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.

8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does 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.

9. 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.

10. 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.

To make sure your debt qualifies for this tax relief, call us today.