Obama's Foreclosure Plan

Foreclosure Tax Relief is a popular topic right now and most consumers who have landed in a foreclose situation need to understand the tax implications of a foreclosure! Even though you no longer own the home, when a bank forgives the debt, you may still have to pay taxes on it! Hows that for a final period on a point in your life you would rather forget?

Foreclosure Debt as Taxable Income?

If you have a mortgage debt eliminated or reduced due to a loan modification or foreclosure, the IRS may consider the amount forgiven as income! Yes, you read it right… the Foreclosure Plan being pushed by the current administration  will cost you, unless you apply for foreclosure tax relief as outlined in The Mortgage Debt Relief Act of 2007. This unique tax relief applies to mortgage debt during tax years 2007 to 2012, and with the record number of foreclosures last year, many taxpayers may be able to benefit.

Normally, debt forgiveness is counted as taxable income on your tax return. In the case of mortgage debt, your lender will send you a year-end statement Form 1099-C, which will show the amount of debt forgiven and the fair-market value of the foreclosed property. To not have the forgiven debt counted as income, you must fill out IRS Form 982, Reduction of Tax Attributes Due To Discharge Of Indebtedness.

According to the IRS tax tips on mortgage debt forgiveness, to qualify:

“The debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.”