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IRS Guidance for Forgiven Mortgage Debt

Posted by Benjamin Dona on Sunday, March 13th, 2011 at 5:47pm.

IRS Guidance for Forgiven Mortgage DebtAccording to a couple of articles I read in the Sunday papers this morning, the IRS has released additional guidance for homeowners that have negotiated a loan modification or short sale and need to understand how to deal with their canceled mortgage debt.


Here's a breakdown of the key points in their latest guidance:

  • First and foremost, the debt canceled by your lender must have been used by you to "to buy, build or substantially improve your main principal residence."
  • Second, you cannot deduct forgiveness on debt for second homes, investment properties, or seasonal properties you occupy for less than 6 months in a year's time.
  • Third, refinanced debt that was used for non-qualifying purposes - tuition, a new car, paying off credit card debt, etc., does not qualify.
  • Finally, if you put a tenant in place and collect rent on your primary residence prior to completing a short sale or foreclosure, you could effectively convert the property to a rental and negate your ability to qualify for debt relief.

There are also maximum debt relief caps. For singles or married owners, the amount is $2 million. For married owners filing separately, the amount is $1 million.

As with everything involving the IRS, we strongly recommend you seek professional financial and/or tax advisor assistance if you are in a scenario where you might qualify for mortgage debt cancellation relief. For more information you can go to www.IRS.gov and download Form 982 and IRS Publication 4681 for additional filing details.

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4 Responses to "IRS Guidance for Forgiven Mortgage Debt"

Zack wrote:
Ahhh, very timely article. Only a few weeks left now till tax day! Lots of people have done loan modifications in the past year and its important they know how to properly handle them on their taxe returns.

Posted on Thursday, March 17th, 2011 at 5:47pm.

Robin in Pensacola wrote:
This information is so timely. Getting a mortgage modification or going through a short sale is complicated in the first place, so being aware that the tax consequences may require additional professional advice will be helpful for us to share with our clients. Thanks so much for pointing out these additional specifics.

Posted on Friday, March 18th, 2011 at 9:36pm.

Allison Ables wrote:
I can't believe it has taken this long to get additional guidance. It seems like it has become the norm for a lot of people doing a short sale to rent it out (like if they relocated for another job) so it sucks if the last part is true.

Posted on Monday, March 21st, 2011 at 7:37pm.

Chris in Austin wrote:
This is a tricky ordeal calculating a gain from having a bank cover your loss on your property. I recommend all of my clients go see a CPA.

Posted on Tuesday, March 22nd, 2011 at 12:59am.

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