If your lender cancels a portion or the entire amount of your debt, you would normally have to pay taxes on that amount that is cancelled. However, the law provides an exception that can apply to homeowners whose mortgage debt was canceled in 2014. In most cases where this exception applies, the amount of forgiven debt is not subject to tax.
Mortgage Debt Cancellation and Taxes
Here are ten tips on mortgage debt cancellation that will save you money on taxes when filing in 2015:
- Principal residence. If the canceled debt was a loan for your main home, you may be able to exclude the forgiven amount of their income. To qualify, should have used the loan to buy, build or substantially improve your principal residence. Your primary residence must also insure the mortgage.
- Loan Modification. If the lender canceled part of your mortgage through a loan modification or an ‘arrangement’, perhaps to exclude that amount from your income. It is also possible to exclude certain amount that has been liquidated as part of the Affordable Modification Program Home,HAMP . Exclusion may also apply to the amount of debt canceled because of a foreclosure.
- Mortgage Refinance. The exclusion may apply to canceled a refinanced mortgage amounts.This would apply only if used profits from refinancing to buy, build or substantially improve your principal residence. The quantities have been used for other purposes not qualify.
- Another Type of Debt Cancelled. Other types of canceled debts such as a second property, rental properties and business credit cards or car loans does not qualify for this special exclusion.Moreover, there are some other rules that could allow such canceled debts are tax exempt.
- Form 1099-C. If your lender reduced or canceled at least $ 600 of your debt, you should receive Form 1099-C , Cancellation of Debt in January next year. This form shows the amount of canceled debt as well as other information.
- Form 982. If you qualify, report the amount of debt excluded on Form 982 , Reduction of Tax Attributes for Debt Settlement. Submit the form with your federal tax return.
- Tool on IRS.gov. The IRS offers several free tools on the website to help you file your tax return. Use the Interactive Tax Assistant on IRS.gov to find out if your mortgage debt canceled is taxable.
- Exclusion Ext. The law gave authority to the exclusion had expired at the end of 2013. The Act Tax Increase Prevention extended it to apply for one year, until December 31, 2014.
- More Information. For more information on this topic, see Publication 4681 , Canceled Debts, Foreclosures, Repossessions and Abandonments.