The Tax Consequences Of Stopping Foreclosure
It used to be that when your home went into foreclosure you were also penalized on it by the IRS. This is no longer the case.
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20 2007 and it allows exclusion of income realized as a result of modification of the terms of the mortgage or foreclosure on your principal residence.
What does that mean in plain English?
Usually debt that is forgiven or cancelled by a lender must be included as income on your tax return; And you would get a 1099 form from your lender. Even if it is not spendable income it used to be considered income and therefore taxable.
However the Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from any type of income.
In other words if homeowners whose mortgage debt was partly or entirely forgiven during 2008 may be able to claim special tax relief by filling out the newlyrevised IRS Form 982 and attaching it to their 2008 federal income tax return according to the Internal Revenue Service.
The new law applies to debt forgiven in 2007 2008 or 2009. Debt reduced through mortgage restructuring as well as mortgage debt forgiven in connection with a foreclosure may qualify for this relief.
In most cases eligible homeowners only need to fill out a few lines on the IRS Form; and you will not be hit with a higher tax bill from losing your home.
Dont get confused by this.
Talk to your accountant when the end of the year rolls around. Make sure that they know you have been in foreclosure and what exactly happened.
They should be up to speed on this new exemption and will walk you thru the correct forms to file. That way you will not be punished from an income standpoint for having your loan modified or your home having gone into foreclosure.
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