Debt Relief Act

Contributor

By Christa Titus
eHow Contributing Writer

Article Rating: (0 Ratings)

The Mortgage Debt Relief Act of 2007 was signed into law on Dec. 20, 2007. Usually, if a mortgage holder refinances their home that has a debt that a lender has forgiven or canceled, the mortgage holder must claim the amount of that former debt as taxable income. However, the Debt Relief Act allows homeowners in such situations to exclude that amount when determining their taxable income.

Purpose

The act was created to help prevent foreclosure by providing tax relief when people had to refinance their homes, and to help them stay in their houses while they repaid their debts.

Eligible Debts

The only debts that fall under this protection are those that are related to buying or building your primary residence, or making substantial renovations to improve it. Unpaid loans that were taken out to cover such situations are also covered by the act.

Amount of Eligible Debt

You can have up to $2 million in debt forgiven under this act. If a married couple files their taxes separately, they can each have up to $1 million forgiven.

Untaxable Debt

Not all canceled debt is automatically subject to taxation, such as debts that are forgiven due to bankruptcy, when you are declared insolvent and in the case of some farm debts.

Second Homes

A cancelled debt on a second residence generally has to be claimed as income. However, according to the National Association of Realtors, if the second home is strictly used as a rental property, a debt that is forgiven on that second home may be qualify for exclusion from income.

Limited Terms

The Mortgage Debt Relief Act only covers qualified debts that were canceled or forgiven from the calendar years of 2007 on through the end of 2012.

IRS Notification

Even if you aren't claiming a forgiven debt as income, you still must alert the IRS to its existence. You have to fill out Form 982 and turn it in with your tax return.