Usually, when a homeowner receives “mortgage forgiveness,” either through mortgage restructuring or foreclosure, the proceeds from the forgiven debt are considered taxable income by the Internal Revenue Service. However, according to the Mortgage Forgiveness Debt Relief Act of 2007, homeowners who have had their mortgages reduced, restructured or eliminated altogether during the period from 2007 through 2012 may be able to exclude the proceeds from the forgiven debt—up to $1 million per person or $2 million per married couple—from their taxable income.
There are some restrictions, however. The proceeds must be used for the purchase, construction or substantial improvement of the homeowners’ principle residence and must be secured by that residence. Proceeds from debt forgiveness on second homes, rental property or businesses do not qualify for this tax exemption. Also, proceeds used to pay off credit cards or other similar types of loans do not qualify.
If your debt is reduced or eliminated, make sure you receive Form 1099-C, Cancellation of Debt, from your lender. For additional details, see Ten Facts for Mortgage Debt Forgiveness at http://www.irs.gov/.
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