If you are one of the smart homeowners who were involved in mortgage restructuring or a short sale in 2012, tax time is an IMPORTANT season for you. There are tax implications associated with debt cancellation/mortgage forgiveness. For those who have been involved this year, here are instructions and tips from Seattleshortsaleblog on how to take advantage of the Mortgage Forgiveness Debt Relief Act that was extended until 1/1/2014!
Here is an example of your liability if the debt relief act did not get extended or if you do not follow tax instructions posted here: Example: If you owe $150,000 on your home and it sells in a foreclosure auction for $100,000, the amount remaining of $50,000 would be taxable income. If you are in the 25% tax bracket, you will have to pay the IRS $12,500 in taxes on the foreclosure.
The Mortgage Forgiveness Debt Relief act allows you to exclude this income on your taxes but you must take action.
Here are instructions directly derived from the IRS Website. Read the full page HERE
If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.
Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.
TIPS For Mortgage Forgiveness from TurboTax: Dealing with incorrect 1099-C forms
If your lender has reduced or eradicated your debt under a short sale or mortgage restructure, it will send you IRS Form 1099-C at the end of the year, showing the amount of the debt forgiven and the fair market value of the property. Review the document carefully and compare it to your own figures. If it contains misstatements, contact the lender and attempt to have it correct the form. If it is not able, or not willing, to do that in a timely manner, recalculate the correct figures and provide the IRS with documentation showing how you arrived at your figures when you file your income tax return.
It is vital to follow these steps after any type of mortgage forgiveness. Please read through these instructions & tips. Also, make sure you are reboosting your credit!
Feel free to contact me at Peter@seattleshortsaleblog.com
Good luck!
Peter
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