What is the Mortgage Forgiveness Debt Relief Act of 2007?
Short Sale Tax implications:
Short Sale Tax implications:
IRS FORM 982
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.
If you receive a 1099-C from a creditor, you must report the amount of the canceled debt as income to the IRS even though you did not actually receive any money (phantom income).
The amount shown in Box 2 of the 1099-C form is the amount that must be reported!) However, the IRS recognizes "Insolvency" as a situation where canceled debt might not have to be reported as income. Insolvency is basically your total debts exceed your total assets at the time your debt was settled or deemed non-collectible. Read more
How short sales and foreclosures affect your Credit:
Reporting a Short Sale:
A short sale is reported as "Settled" or "Canceled" which means that you've reached an agreement to repay only a portion of the total amount. The remainder is written off as a loss by the creditor.
Reporting a Foreclosure:
Foreclosure or a deed-in-lieu is always reported as NOT settled, causing credit scores to decrease 200 to 300 hundred points (caused from missed payments), depending on prior credit history. Foreclosure will remain on your credit for 7 to 10 years.
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonment's. Also see IRS news release IR-2008-17.
Click Here to see if you could qualify for a SHORT SALE!
