IRS Guidance for Forgiven Mortgage Debt
Posted by Benjamin Dona on Sunday, March 13th, 2011 at 5:47pm.
According 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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