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Thursday, March 13, 2014

Understanding the provisions of the Mortgage Forgiveness Debt Relief Act

By Paul Ritz

The Mortgage Forgiveness Debt Relief Act, 2007 expired at the end of the year 2013. Since then there has been a demand for the re-enactment of this act and if republicans get their way then there is every possible reason to believe that this act will be re-enacted in the favor of the American public. Many people have questions regarding this legislation, in this article we will try to answer some of these questions and project a clear picture of what this act is and how you can benefit from it.
    Mortgage Forgiveness Debt Relief Act
    Up to $2 mln in forgiven debt can be exclude from taxable income
  • Overview of the act:
As the name of this act implies, it provides relief to those who are in a financially strained conditions. Let’s consider a practical example, suppose that you owe someone some amount of money, if the lender decides that you are in a financially difficult position and you will not be able to repay him and hence he decides to forgive that debt then this forgiven amount becomes taxable as it is seen as an income by the federal government. The purpose of this act is to allow the citizens to save this amount from being taxed
  • Does this law apply to all forgiven debts
This is one of the most common questions that people ask regarding the Mortgage Forgiveness Relief Act. The answer is a straight No. Not all kind of debts that have been forgiven fall under the provisions of this act. This act applies to only those forgiven debts that were used to buy, improve, build or rebuild your principal residence. If you have refinanced your mortgages which were used for the same purposes mentioned above then those forgiven debts also fall in the purview of this act.
  • What is the maximum limit of forgiven debt that can be tax exempted?
The maximum amount of forgiven debt that can be excluded from the taxable income is 2 million dollars. If a married couple decides to file separately then this limit is reduced to one million dollars for each individual.
  • Are there any exceptions to this act?
Yes, there are. If the lender has forgiven the debt in exchange of some services that you might have provided him then the forgiven debt will be perceived as taxable income. For more information on such exceptions we will advise you to take a good look at the IRS press release IR-2008-17.
  • Is there any alternative to this Act?
Yes, there is a very practical and viable alternative to this Act. It is known as the Insolvency Exclusion Plan. If your debt was not forgiven during the period of 2007 – 2013 then this is the most practical alternative for you. In fact it has been highly praised by those who were against the Mortgage Forgiveness Debt Relief Act. In the Insolvency Exclusion plan, a citizen can escape from being taxed on the forgiven debt if he can show that his total assets are less than the total liabilities or debts that he owes.
  • Do I need to report my forgiven debts on my tax returns?
Yes, you do need to report it on your tax returns. You need to mention your forgiven debts on form 982.


About the author: This article is written by Paul Ritz. Paul provides free debt consolidation counseling session for consumers to discover their options for debt relief with no obligation.
  
Image license: Revisorweb; GFDL, CC BY-SA 3.0