Homeowners who had mortgage debt partly or entirely foregiven (restructuring, short sale or foreclosure) on their principal residence during 2007 may be able to claim special tax relief. The IRS just released the details on the new law this week.
To take advantage of this tax relief, you’ll need to fill out Form 982 and attach to 2007 federal income tax return. Most people only have to fill out lines 1e, 2 and 10b.
NOTE: If you have a do-it-yourself software packages, chances are you do NOT have this form since the regulations just came out (2/12/08)
Some of the rules:
- Loan balance must be less than $2 mill. ($1 mil for married filing separately.)
- Law is in effect for 2007, 2008 and 2009.
- 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 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 does not qualify for the new tax-relief provision.
- Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender.
- For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.