# Presentation: 323872

## Mortgage Forgiveness Debt Relief Act of 2007

## What is the Mortgage Forgiveness Debt Relief Act ?

- The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007
- The Act allows taxpayers to exclude from income certain canceled debt on their principal residences.

**Notes:**

Generally, debt that is forgiven or canceled by a lender must be included on a return as taxable income.   

Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude certain debt forgiven on their principal residence

Maximum amount that can be treated as qualified principal residence indebtedness is $2 million ($1 million for a married person filing a separate return.)  

Homeowners whose mortgage debt was partly or entirely forgiven may be able to claim special tax relief by filing Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with their federal income tax return. The form is available on IRS.gov.

## Mortgage Forgiveness 

_**The new law includes**_:
- Important provisions for struggling homeowners whose home has been foreclosed or terms of mortgage modified
- Applies to qualified debt forgiven in 2007, 2008 or 2009

**Notes:**
The new law contains important provisions for struggling homeowners.  “We urge people with mortgage problems to take full advantage of the valuable tax relief available!” 

The new law applies to debt forgiven in 2007, 2008 or 2009. 

## Cancellation of Debt

- Borrowers whose debt is reduced or eliminated receive a Form 1099-C, Cancellation of Debt, from their lender.
- Form 1099-C, box 2 will show the amount of debt forgiven or canceled.

**Notes:**
Usually, debt that is forgiven or canceled by a lender must be included as income on a tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude certain canceled debt on their principal residence from income. 

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

## Form 1099-C

**Notes:**
The lender should send a Form 1099-C, Cancellation of Debt (by January 31th of the year following the debt forgiven/canceled), to the debtor. The amount of debt forgiven or canceled will be shown in box 2.  Example: If the debt was forgiven/canceled in 2008, the lender should send the Form 1099-C by Jan 31, 2009.   

If in the same calendar year, a foreclosure or abandonment of property occurred in connection with the cancellation of the debt, the fair market value (FMV) of the property will be shown in box 7. In addition, a separate Form 1099-A, Acquisition or Abandonment of Secured Property, will be issued to the debtor.

## Qualifying Cancellation of Debt 

- The debt must have been used to _buy_, _build_ or _substantially improve_ the taxpayer's principal residence and must have been secured by that residence.
- Debt used to _refinance a principal residence_ is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing, would have qualified.

**Notes:**
See Pub 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for individuals), for more details and examples. The Pub is available on IRS.gov.

Example: In 1995, Becky purchased a principal residence for $315,000. Becky took out a $300,000 mortgage loan to buy the principal residence and made a down payment of $15,000. The loan was secured by the principal residence. In 1996, Becky took out a second mortgage loan in the amount of $50,000 that she used to add a garage to her home.

In 2001, when the outstanding principal of her first and second mortgage loans was $325,000, Becky refinanced the two loans into one loan in the amount of $400,000. The FMV of the principal residence at the time of the refinancing was $430,000. Becky used the additional $75,000 debt ($400,000 new mortgage loan minus $325,000 outstanding principal balances of Becky’s first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her daughter.

After the refinancing, Becky’s qualified principal residence indebtedness is $325,000 because the debt resulting from the refinancing is qualified principal residence indebtedness only to the extent the amount of debt does not exceed the amount of the refinanced debt.

## How to Report

- The amount of debt forgiven must be reported on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)
- File Form 982 with the tax return.

**Notes:**
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. 

If using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. 

If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b.  

If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.   
File the Form 982 with the tax return. 

## Form 982

**Notes:**
You can download the form at www.irs.gov or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery. 

## Mortgage Relief Act

- _Borrowers are urged to:_
- Check Form 1099-C carefully
- Notify the lender immediately if any of the information shown is incorrect
- Pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box 7)

**Notes:**
People with mortgage problems are urged to take full advantage of the valuable tax relief available. 

## Mortgage Debt Relief Exclusions

- Exclusions that may result in part or all of the income
- from the cancellation of debt being nontaxable include:
- Bankruptcy
- Insolvency
- Certain Farm Debts
- Non-recourse loans
- Qualified Principal Residence Indebtedness
***The rules involved in these exclusions are complex. It is recommended that ***
***taxpayers who believe they may quality for one of these exceptions seek the ***
***assistance of a tax professional***.

**Notes:**
There are several exceptions and exclusions that may result in part or all of the income from the cancellation of debt being nontaxable. The most common situations when cancellation of debt income is not taxable include: 
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income. 
Insolvency: If a taxpayer is insolvent when the debt is canceled, some or all of the canceled debt may not be taxable. A taxpayer is insolvent when their total debts are more than the fair market value of their total assets. Insolvency can be fairly complex to determine. 
Certain farm debts: If a taxpayer incurred the debt directly in operation of a farm, more than half of their income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, the canceled debt is generally not considered taxable income.
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue the taxpayer personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
Qualified Principal Residence Indebtedness: Taxpayers can exclude canceled debt from income if it is qualified principal residence indebtedness.

Generally, if you exclude canceled debt from income under one of the above provisions, you must also reduce your tax attributes (certain credits, losses, and basis of assets).
The rules involved in these exclusions are complex. It is recommended that taxpayers who believe they may quality for one of these exceptions seek the assistance of a tax professional.  

## New Law Can Help Taxpayers

- The Internal Revenue Service is encouraging those with mortgage problems to seek assistance with their Federal taxes.
- Qualified taxpayers may be able to exclude income related to canceled debt on a principal residence.
- This can help families, who are already in financial difficulty, by avoiding a large tax bill.

**Notes:**
Since the law passed in late December 2007, IRS is working to get the word out about the new law that will help many taxpayers with mortgage problems.

Reports show that many tax returns with Form 1099-C attached did not include the Form 982. That form is required to exclude the income related to canceled debt.  

The issue of debt forgiveness can be complex.  IRS has revised the Form 982 and the Instructions to assist taxpayers.  In addition a new Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for individuals), was developed with examples that also provide assistance with this new law.  The form and publication can be downloaded at www.irs.gov or by calling 1-800-829-3676.

## For Additional Information 

_**Additional Resources**__:_
**Publication 4681** Canceled Debts Foreclosures, Repossessions, and Abandonments (for individuals)
**Form 982**, Reduction of Tax Attributes Due to Discharge of Indebtedness
**1099-C**, Cancellation of Debt
- IRS.gov - The Mortgage Forgiveness Debt Relief Act of 2007.  See **News Release IR-2008-17** and FAQs on the **Mortgage Forgiveness Debt Relief Act**

## For Tax Help

- Visit the IRS Web site – _[IRS.gov](http://www.irs.gov/)__ for the most up to date information_
- Speak with an IRS Representative at 1-800-829-1040
- Visit a Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) Site
- Visit an IRS Taxpayer Assistance Center (TAC)
- If you are having difficulty resolving a tax problem through normal IRS channels, the _[Taxpayer Advocate Service](http://www.irs.gov/advocate/index.html)__ may be able to help. Contact TAS  toll-free case intake line at 1-877-777-4778, TTY/TDD 1-800-829-4059._
- Seek assistance from a tax professional** **