Originally HR3648, signed into law on December 20th 2007. The law eliminates the phantom tax related to forgiveness of debt related to foreclosure, short sale and loan modification (principal reduction). Law is applicable to forgiveness of debt realized between January 1st 2007 to January 1st 2012. Prior to passage any debt forgiven was “cancelled” and was required to claimed as 1099 income. Below are some of the guidelines for the law:
- Debt must have been debt incurred to acquire a principal residence.
- Cancelled debt up to $2,000,000 is eligible.
- Sets forth rules for determining the allowable amount of the exclusion for taxpayers with non-qualifying indebtedness and taxpayers who are insolvent.
- Debt from a second (non acquisition) mortgage or HELOC is not eligible (unless used to improve basis of property).
- Debt from a cash out refinance is not eligible (unless used to improvebasis of property).
- Cancelled debt from investment properties and second homes is not eligible.
DISCLOSURE – We are not income tax professionals. You’re advised to review the Mortgage Forgiveness Debt Relief Act of 2007 at the IRS website, click here. You’re also advised to consult with an income tax professional to discuss how the law applies to your individual scenario.
If you’d like to know if you qualify for a short sale, you may Cy Marlow at 1-812-234-8808 to set up a confidential meeting to discuss your situation