Mortgage Forgiveness Debt Relief: Expect Tax Form 1099-C from Lender

Mortgage Forgiveness Debt Relief: Expect Form 1099-C from Your LenderThe tax break for forgiven mortgage debt was renewed for another year by lawmakers last month, much to the relief of thousands of homeowners who took part in short sales or other transactions which wiped out a portion of what they owed.
So what now? Those who fall under the tax break under the Mortgage Forgiveness Debt Relief Act should have received, or are about to receive, Form 1099C (Cancellation of Debt) from their lender, if the amount of cancelled debt was more than $600.
This form must state the amount of the debt forgiven and the fair market value of any property given up through foreclosure or a short sale.
“Qualified principal residence indebtedness” is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners involved in short sales.
Before the law, debt that was forgiven or cancelled by a lender had to be included as income on your tax return and became taxable.
But the Mortgage Forgiveness Debt Relief Act, enacted as the foreclosure crisis began to peak, allows borrowers to exclude certain cancelled debt on their principal residence from income.
Debt reduced through mortgage restructuring, and  mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
Benny L. Kass, a Washington lawyer, writes in the Washington Post that homeowners should understand that some lenders — even if they tell you and the IRS that your debt has been canceled — “still try to collect any deficiency, often by turning the matter over to a debt collection company.”
Kass said this is especially true with short sales.
“If you are involved in such a short sale, make sure you know all the terms and conditions before you complete the deal,” Kass said.
Even if the amount of debt forgiven is excluded from your taxable income, that amount must be reported on Form 982 and this form must be attached to your tax return.

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