Monthly Archives: February 2012

Canceled Debt & Mortgage Forgiveness

People who have lost their homes through foreclosure or who have restructured their mortgage loans may qualify for tax relief under a new tax law, the Mortgage Forgiveness Debt Relief Act of 2007. The tax relief was extended to cover the years 2007 through 2012 under the Emergency Economic Stabilization Act.

Exclude up to $2 million of debt forgiven or canceled by a mortgage lender on a main home.
Both mortgage restrucuring and foreclosures qualify
Available for the years 2007 through 2012.
Claim the tax relief using IRS Form 982

What is Canceled Debt Income?

Anytime a lender cancels, or forgives, your debt, that is considered income to the debtor. The tax laws considers this income, and the debtor is taxed on forgiven debt unless an exception applies.

Canceled Debt That is Taxable

Anytime a lender cancels or forgives debt, that is usually a taxable event. “Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income.” (Source: Publication 525)
Debt forgiveness is reported by the lender using Form 1099-C, Cancellation of Debt. Individuals report the forgiven debt on their Form 1040, Line 21 as other income.

The tax laws provide several exceptions to the tax treatment of forgiven debts. Tax-free treatment of mortgage debt is the most generous and easiest to calculate.

Mortgage Restructuring and Foreclosures

Individuals who lost their homes through foreclosure will not have to pay income tax on the amount of mortgage debt that was forgiven or canceled. Tax-free treatment is also available to people who restructured their mortgages loans for a lower balance.
The tax-free exclusion applies to canceled mortgage debt of up to $2 million (or $1 million is married and filing a separate return). There are additional details to consider to qualify for this tax exclusion. The house must have been used as a main home, which means it was the principal place of residence for the debtor. Also, the debt must have been used to buy, build, or make substantial improvements to the residence.

Some mortgage debt won’t qualify for this tax-free exclusion and will be considered taxable income. Mortgage loans that don’t qualify include home equity loans where the proceeds were not used to buy, build, or improve the residence. Also, mortgages for second houses and rental properties do not qualify for the exclusion. However, some or all of this debt might qualify for other exclusions.

The IRS explains the tax break this way: “Taxpayers can exclude up to $2 million of debt forgiven on their principal residence. The limit is $1 million for a married person filing a separate return. This provision 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 qualify for this relief.” (Source:

Individuals who qualify for this tax relief will need to use Form 982 to report the canceled debt.

Other Exclusions for Canceled Debts

Besides the provision for mortgages on main homes, the tax code provides other ways that canceled debt can be tax-free. Canceled debts do not need to be included in taxable income if the debt was canceled in a bankruptcy case, if the individual is insolvent, or if the canceled debt was intended as a gift. Certain business or farm property may also qualify for tax-free treatment.
The insolvency exclusion is particularly relevant, as it will likely apply to borrowers with home equity loans or mortgages on second homes and rental properties.

This insolvency provision will prove helpful to individuals who don’t otherwise qualify for the mortgage debt relief. To be considered insolvent, the person’s liabilities must exceed the fair market value of their assets. This is will be especially true of borrowers who’s properties have dropped in value and who now must restructure their loans or surrender their properties through foreclosure.

“You are insolvent when, and to the extent, your liabilities exceed the fair market value of your assets. Determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent.” (Source: Publication 908)

Canceled Debt Resources from
Overview of Canceled Debts
Q&A on Home Foreclosure and Debt Cancellation
Insolvency and Bankruptcy Exclusions
Necessary Tax Forms
Form 982 (PDF)
Legislative Details about the Mortgage Forgiveness Debt Relief Act
Fact Sheet from the White House
Text of HR 3648 from the Library of Congress
Related Articles
Mortgage Forgiveness – Figuring the Tax on Canceled or Forgiven Mortgage De…
More Information About Canceled Debts and Mortgage Forgiveness
Short Sale Canceled Debt – Canceled Debt Taxes on Short Sales
Foreclosures – the Tax Consequences of a Foreclosed Home
Taxes on Settled Debt – Form 1099-C Cancellation of Debt

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Posted by on February 29, 2012 in Tax Relief


States Tackle Discrimination Against Unemployed

Monday, February 27, 2012

By JULIE STEINBERG (follow FINS on Twitter, Facebook and RSS)
If you’re unemployed, you know how hard it is to find a job. Not just because many people are vying for the same one, but because companies are able to say they won’t hire someone who currently doesn’t have a job.

More than a dozen states are looking at legislation that would make it illegal for companies to refuse to hire the unemployed.

States including Connecticut, California and Colorado are considering various sorts of bills. One would ban advertisements that mandate candidates be employed while others would allow job candidates who don’t snag the position to sue businesses for discrimination.

Since December 2009, six months after economists declared an end to the recession, the percentage of long-term unemployed, or those looking for work for more than six months, has stayed above 40%. The longer one is unemployed, the harder it is to get a job.

The new measures may also encourage companies in other states to revisit their hiring rules. (WSJ)

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Posted by on February 27, 2012 in Tax Relief