Taxes: Relief for Mortgage Debt Forgiveness
For some reason, the government has been counting debt forgiveness as income. Inman News explains how this whole debt forgiveness as income used to work:
In other words, if your lender forgave $20,000 in mortgage debt because your house was worth $20,000 less than your mortgage balance, the IRS treated this debt forgiveness the same as income that you earned from your job — and required you to add $20,000 in phantom income to the amount of your annual income and pay tax on it at your marginal tax rate.
This was a bit odd. Since if your home had declined in value, there are obviously other market factors at play. If you can’t pay your home mortgage loan, how are you to afford the income tax? The other obvious incongruity is that mortgage debt forgiveness is not the same thing as actually being handed a check. You don’t actually see the money, and it doesn’t help you in any of the ways you expect from income. So collecting income tax on it seems…wrong.
That is now being remedied. Sort of. Starting this tax season and lasting through 2009, you don’t have to pay income tax on mortgage debt forgiveness. There are rules to this tax relief plan, though. The home has to be a primary residence, and things like debt forgiveness on money you took out as part of a refinance or home equity loan (unless you can prove the money was used for home improvement) doesn’t count, either.
So talk to your tax preparer or an accountant. Or visit the IRS Web site. Figure out what documentation you’ll need (you always need documentation) and whether you qualify. Because if you’ve enjoyed mortgage debt forgiveness, there’s no reason to pay income tax on it.
Tags: income tax, mortgage loan blog, home mortgage loan, mortgage debt forgiveness,
taxes, tax relief
February 1st, 2008 at 1:32 pm
[…] Castina wrote an interesting post today onHere’s a quick excerptFor some reason, the government has been counting debt forgiveness as income. Inman News explains how this whole debt forgiveness as income used to work: In other words, if your lender forgave $20000 in mortgage debt because your house … […]
February 6th, 2008 at 1:02 pm
[…] relief continues for homeowners in various forms for this 2007 tax season. Mortgage debt forgiveness is no longer considered income, and there have been some other points that should be made concerning tax […]