Most of the US citizens consider bankruptcy as the sole legal method of mortgage debt forgiveness. Filing bankruptcy not only discharges your debt but also taxes that you owe after the debt has been discharged. According to the Mortgage Debt Relief Act passed by Congress in 2007 that grants you tax relief with mortgage debt forgiven by other methods instead of filing bankruptcy.
Know about bankruptcy:
Present bankruptcy code is the amended version of the bankruptcy laws formed in 1978. Chapter 7 and 13 are considered to be the most common type of bankruptcy. In chapter 7, your non exempt property is liquidated by the court appointed to pay off the creditors. In chapter 13, the trustee reorganizes your debts and prepares a repayment plan according to your financial situation. Debts those are not payable inclusive of mortgage debt can be discharged under chapter 7 and 13 Bankruptcy. These discharged debts will not be treated as taxable income by the IRS.
An overview of tax consequences:
Remember that home loan is considered to be income by the IRS but it is not taxable as the homeowners repay it. Your loan can be treated as taxable income if the lenders forgive your mortgage debt and you are not required to repay it. You should know that the lenders can forgive the mortgage through shot sale if you can’t afford to pay off the debt and taxes can be unaffordable in such situation.
Know about Mortgage Debt Relief Act
The taxes owed on the amount that has been let off by mortgage lender can be forgiven through the Mortgage Debt Relief Act. People who qualified for Mortgage Debt Relief Act between 2007 and 2013 can reap the benefits of this Act. Usually, the IRS terms it a mortgage loan once you meet the criteria of qualifications qualified principal residence indebtedness. Remember that your benefit limit should be $2 million or $1 million if you are filing separately despite of being married.
What are the forms required?
You should be aware in case the qualified principal residence indebtedness exceeds $600 then the lender will send you and the IRS a Form 1099-C at the end of the tax year. In such situation, you can qualify for the benefits of Mortgage Debt Relief Act. Make sure that you complete lines 1e and 2 on Form 982 to get the benefits and submit that form with your taxes. You can get the form through tax preparation software or you can download it from the IRS website.