Special Exclusion for Cancellation of Mortgage Debt

There are some special tax rules that can go into effect when there cancellation of mortgage debt. If a mortgage lender cancels or forgives money owed, you will generally have to pay tax on the unpaid amount. However, when it comes to your home, there is an important exception to this rule would have applied in tax year 2013. Here is important IRS information about this special exclusion when it comes to the cancellation of a mortgage debt.

 

Special Income Exclusion for Cancellation of Mortgage Debt

If the canceled debt was a mortgage of his residence. principal, you may exclude from income the amount paid. To qualify, the loan must be used to buy, build or substantially improve your principal residence. The loan also must be secured by your property.

 

Special Income Exclusion for Cancellation of Mortgage Debt

  • If the lender reduced the amount of mortgage debt through a loan modification (also known as a ‘fix’) last year, you may qualify to exclude from income the reduced amount. You may also exclude from income the amount of the canceled debt through foreclosure.
  • This exclusion may also apply to amounts refinanced mortgage canceled. This only applies if the income of the refinancing were used to buy, build, or substantially improve the principal residence. Income used for other purposes are not eligible. For example, a loan used to pay off your credit card debt does not apply.
  • Other canceled debts do not qualify for this special exclusion. This includes debt canceled in a second home, rental properties and business, credit cards and auto loans.
  • If your lender reduced or canceled at least $ 600 of your mortgage debt, you should receive Form 1099-C, Cancellation of Debt, (in English), in January next year. This form shows the amount of the canceled debt plus other information. Notify your lender if the information on the form is incorrect.
  • Report debt excluded in  Form 982 , Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal taxes.

 

Using IRS E-File with Cancellation of Mortgage Debt

Use IRS e-file to file your tax return. E-file is the easiest way to file your taxes because the tax software will make the process more feasible. You can also use IRS Free File to prepare and file your taxes via free tax software programs or filling interactive forms at no cost. Additionally, you can electronically file your return using commercial software or through a tax preparer.

 

Special Exclusion for Cancellation of Mortgage Debt

For more information on this topic, see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments (Cancellation of debt, foreclosure, abandonment and recovery).