Real Estate Forgiveness Act
The Mortgage Forgiveness Debt Relief Act of 2007 stated that homeowners who had debt forgiven on their qualified primary residence were not required to pay taxes on the amount that was forgiven. The act prevented injury from being added to insult by protecting homeowners in the midst of losing their homes from having to pay additional taxes. If you meet the criteria, you may be able to avoid paying taxes on the loss of your primary residence.
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IRS Definition of Forgiven Debt
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The IRS considers forgiven debt to be any part of a loan that has been written off by a lender. For example, if you owed $350,000 on your mortgage, but sold the house through a lender-approved short sale for $300,000, the lender would write off the $50,000 difference and this amount would be considered forgiven. Other paths that lead to debt forgiveness are a foreclosure in which the lender auctions the home for less than is owed, a modified mortgage in which the lender will receive less in payments than originally agreed upon, and a second mortgage that has been altered due to a debt settlement agreement.
Prior to the Act
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Prior to the Real Estate Forgiveness act, your lender would report its loss to the IRS and send you a Form 1099-C. You were then expected to claim the amount written off as income on your annual income taxes.
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How the Act Changes Things
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Since the initiation of the forgiveness act, loan amounts of less than $2 million, or $1 million if married but filing separately, qualify as long as the money is used to finance your principal residence. To take advantage of the act, you must fill out several lines on IRS Form 982 when you complete your taxes.
Refinancing
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The Mortgage Forgiveness Debt Relief Act also applies to debt that has been incurred by the refinancing of your home, but only to the amount that the old principal balance would have qualified.
Time Frame
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When the act was first written, lawmakers meant for it to last through 2009. However, it has been extended to last through 2012, as of publication.
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References
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