A trusted title company recently sent me some great
info on the taxation of forgiven debt. Read below for the details.
Taxation of forgiven debt
Taxation of forgiven debt
Generally,
if you owe a debt to a lender and the lender cancels or forgives that debt, the
cancelled amount may be taxable. The theory is that the money you received when
you borrowed it was not included in your income and was not taxed because you
were obligated to repay it. When that
obligation is forgiven, the amount you received as loan proceeds becomes
reportable as income because you no longer have an obligation to repay the
lender. The lender is usually required
to report the amount of the canceled debt to the taxpayer and the IRS on a form
1099-C, Cancellation of Debt. Simple
example: You borrow $50,000 and default
after paying back $25,000. If the lender forgives and does not seek to collect
the unpaid debt from you there is a cancellation of $25,000 of debt which is
generally taxable to you as ordinary income.
Is Cancellation of Debt income always
taxable?
No, there
are some exceptions which render cancelled debt non-taxable, the most common of
which are as follows:
- Bankruptcy: debts discharged through bankruptcy are not considered taxable income
- Non-recourse loans: A loan for which the lender's only remedy in case of default is to repossess the property used as collateral does not create forgiven debt income if the debt is not paid
- Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts exceed the value of all of your assets
- Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners (see below)
Mortgage Forgiveness Debt Relief Act
of 2007
- Generally, the Act allows for the exclusion
of income realized as a result of the lender's forgiveness of indebtedness on
your principal residence, resulting from loan modification, short sale or
foreclosure sale
- ONLY applies to forgiven or cancelled debt used to BUY, BUILD OR SUBSTANTIALLY IMPROVE your principal residence or to refinance debt incurred for these purposes
- The maximum amount of debt that qualifies for this exemption is $2 million, if married, filing jointly, or $1 million, if filing separately
- This Act applies to principal residence debt forgiven in calendar years 2007 through 2012(unless extended by Congress). NOTE THAT THIS FORGIVENESS PROVISION WILL EXPIRE 12/31/12 UNLESS EXTENDED BY CONGRESS!
- If forgiven debt is excluded from income it must be reported on Form 982 and this form must be attached to your tax return.
For more
detailed information go visit this website.
As
a top Realtor, I can give you more insight regarding this article. If you have questions, feel free to call me, Mynor Herrera, I can also give you expert
help buying or selling in the DC, MD, & VA areas! I also specialize in
Bethesda and Chevy Chase, as well as the sub-divisions of Rosemary Hills, Rock
Creek Forest, East Bethesda, and Whitehall Condominium.
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