After the mortgage crunch of 2007, many mortgagers found themselves in a position where the value of their homes was less than the outstanding loan on their houses. Many foreclosed houses and regular house sales yielded shortages on the outstanding house loan. Luckily, many banks and mortgage financers opted to write off the shortages on the mortgages as opposed to pushing the liability onto former mortgagers. However, being forgiven of part of one’s mortgage debt comes with tax implications. Generally, the tax law requires any taxpayer who has been forgiven a debt to pay taxes on the amount forgiven.
With how to apply for mortgage relief ? The mortgage financers are required by law to provide the mortgage-relieved-borrower a 1099 tax form that includes the amount of mortgage debt forgiven. Lawfully, the taxpayer is required to report the forgiven loan as income in their tax returns. However, there is some good news for anyone who was forgiven a house loan debt between 2007 and 2012. In 2007, Congress passed into law, the Mortgage Forgiveness Debt Relief Act of 2007.
Under this law, anyone who sells their house and gets mortgage debt forgiveness or any mortgager who restructures their mortgage debt in a way that reduces the outstanding mortgage debt is exempted from paying taxes on the forgiven mortgage debt to a maximum of $2 million. For married spouses who choose to file separately, the cap goes down to $1 million. The law was passed to provide relief to the many victims of the recession that started in 2007 who were forced to put their houses up for foreclosure.
The act only applies to cancelled or forgiven debt that was used to improve your home, buy a home or build your own home. It also applies to a refinancing you have acquired in relationship to your home. The debt must be secured by your home and is known as qualified principal residence indebtedness.
This mortgage relief should be able to help many homeowners as it will dramatically reduce their taxes for the year. This relief will hopefully help those with a mortgage to find a beneficial and common solution to their mortgage issues without resulting in bankruptcy.
Learn more about Obama Mortgage Relief Plan Qualifications.
