Mortgage Workouts - Tax-Free for Many Homeowners

There is now tax relief for struggling homeowners. If your mortgage debt is partly or entirely forgiven during 2007, 2008 or 2009, you may be able to claim special tax relief.  

Normally, debt forgiveness results in taxable income.  But under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.  The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence.  Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for this special tax-relief provision.  In some cases, however, tax relief based on insolvency or other special provisions of the tax law may be available. 

If your debt is reduced or eliminated, you will receive a year-end statement (Form 1099-C) from your lender.  By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

The information included on the 1099-C is not always correct and it may be necessary to notify the lender immediately if any of the information shown is incorrect.  Of primary importance is the amount of debt forgiven (Box 2) and, if the 1099-C relates to a foreclosure, the value listed for your home (Box 7).

If you have debt or mortgage relieved during the year, you are encouraged to contact this office so we can determine its effect on your tax liability and explore any mitigating options before the year’s end.  

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