Forgiven Mortgage Debt: Some Valuable Facts on Extended Tax Break

Forgiven Mortgage Debt: Some Valuable Facts on Extended Tax BreakThe extension of a tax break on forgiven mortgage debt was a huge relief for the housing market and homeowners going through short sales or mortgage modifications to avoid foreclosure.
But the one-year extension of the Mortgage Debt Relief Act has its limits, and some states need to take their own legislative action to extend the tax relief, including California.
There are also other factors to consider if you fall into the category of mortgage forgiveness.
In the case of a “recourse” loan, for example, the borrower is personally responsible for the debt, as apposed to the more fortunate borrowers in “none-recourse” states. In recourse states, however, the lender may force the homeowner to pay the difference if the sale of the property doesn’t pay off the balance that’s owed to the lender.
The IRS reminds borrowers that forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. But, it may result in other tax consequences.
The Mortgage Debt Relief Act applies only to forgiven or cancelled debt used to “buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes,” according to the Internal Revenue Service.
In addition, the debt must be secured by the home. This is known as “qualified principal residence indebtedness” in IRS jargon.
The maximum amount you can treat as “qualified principal residence indebtedness” is $2 million, or $1 million if married filing separately.
Historically low mortgage rates have caused refinancing applications to surge over the past year. So does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
The IRS says that debt used to refinance your home qualifies for the Mortgage Debt Relief Act, but only to the extent that the “principal balance of the old mortgage, immediately before the refinancing, would have qualified.”
Keep in mind, the amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

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