How to Qualify for Mortgage Forgiveness on a 1040-ES
One of the additions to the 2007 tax code is a provision for excluding mortgage forgiveness amounts from the adjusted gross income. Mortgage forgiveness is the amount a lender usually allows the borrower to take off of the mortgage due to a drop in property value. The qualifying rules for this exclusion is the same for every taxpayer, including those who file a 1040-ES form.
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Instructions
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Apply this provision only for tax years 2007, 2008 and 2009.
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File only on the home that is your primary residence. The provision doesn't allow exclusion for the indebtedness of rental property or second homes.
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Confirm that the debt used to buy, build or substantially improve your principal residence. The exclusion also applies to debts reduced by restructuring or forgiven through foreclosure.
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Claim up to $2 million, or up to $1 million for those who are married but filing separately. In addition, only the proportionate amount of the loan that is considered part of the mortgage forgiveness can be excluded.
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Subtract the amount of the debt that encompasses services rendered by the lender or because of any factor other than the loss of value on the home.
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Tips & Warnings
Taxpayers who have had a large amount of debt excluded, and cannot qualify all of that debt under this provision, may want to use the insolvent taxpayer exclusion.
This exclusion does not apply to loans discharged under Title 11 bankruptcy.
Only acquisition debt, the amount left over after the sale, is considered qualified indebtedness. Equity debt, the difference between the mortgage and the home's value before sale, doesn't qualify.
