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Wednesday, October 1, 2008

Forgiven Mortgage Debt May Qualify for Tax Relief

Homeowners struggling with house payments or foreclosure issues may find some relief from the Internal Revenue Service.

If mortgage debt has been partly or entirely forgiven for 2007, 2008 or 2009, homeowners may be able to claim special tax relief by filling out Form 982 and attaching it to their federal income tax return for the appropriate year.

Debt reduced through mortgage restructuring or forgiven in connection with a foreclosure may qualify for this relief. The debt must have been used to buy, build or substantially improve a 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 forgiveness normally results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, home­owners may be able to avoid paying taxes on up to $2 million of debt forgiven on a principal residence. The limit is $1 million for a married person filing a separate return.

The tax relief does not apply to debt forgiven on second homes, rental property, business property, credit cards or car loans.

For more information, visit the IRS web site at