Learn More About the Mortgage Forgiveness Debt Relief Act

UpdatedJun 30, 2015

Key Takeaways:

Review the tax implications for forgiven debt.
Submit IRS Form 982 in a timely manner.
Consult with a tax professional, whenever a question of forgiven debt arises.

How does the Mortgage Forgiveness Debt Relief Act work? What are the qualifications? What forms do we file with our taxes?

My wife and I purchased a home in 2005. The interest rates shot up out of control and needless to say we lost our home in 2009. We are filing our taxes for 2009. At first when we filed we were told we owned $35,000 to federal and state. I did some research and came across the Mortgage Forgiveness Debt Relief Act of 2007. The problem is we had a duplex. Does the debt relief act of 2007 protect home owners who lived in rental properties they owned? The loan balance was $167,900 and the bank sold the property for $30,600.

Under federal law, a financial institution is required to file a Form 1099-C whenever it forgives or cancels a loan balance greater than $600. This may create a tax liability for the debtor because the canceled debt is considered “income” for tax purposes.

However, the Mortgage Forgiveness Debt Relief Act of 2007 provides tax relief for some mortgage loans forgiven in 2007 through 2012. The Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence.

MFDRA extended

The Mortgage Forgiveness Debt Relief Act was originally scheduled to expire at the end of 2012, but Congress and the President acted to extend it through 2013, then again to extend it to 2014. It remains to be seen if they will act again and extend the protections through the end of 2015.

Regarding your question about the duplex qualifying, I can find no indication in the tax code that would disqualify a duplex from the Mortgage Forgiveness Debt Relief Act if half of the duplex was purchased for and used as your household residence.

The Mortgage Forgiveness Debt Relief Act of 2007 includes the cancelation of the complete debt. If the mortgage terms were renegotiated, up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). According to the IRS, the exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

IRS Form 982

The amount of debt forgiven must be reported on Form 982 and this form must be attached to the taxpayer’s tax return.

You qualify for the Mortgage Forgiveness Debt Relief Act if the home was your principal residence. If so, be sure to report the canceled/forgiven amount on Form 982, and include that form with your income tax return. See the IRS page "The Mortgage Forgiveness Debt Relief Act and Debt and Cancelation" for more information. Whenever a Form 982 is required, I recommend that professional tax help is used to ensure the form is filled out properly.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

10 Comments

LLisa, Feb, 2014

We had a short sale on our home back in 2009 in which there were two mortgages. The first bank was paid in full, however, the second bank was not. They agreed to let the house sell, however, they did not discharge the loan at that time even though it became unsecured. They tried unsuccessfully to collect the money we owed for four years and finally forgave the debt in October of 2013. My accountant says that because the house was sold in 2009, but the debt was not forgiven until 2013, that we may not be able to exclude the debt forgiven under the Mortgage Debt Relief Act, but I have read the act and don't see where it says that the short sale and the debt forgiveness must occur in the same year. At any rate, my accountant has no idea how to handle this and I am currently unable to file my 2013 taxes and scrambling for answers. Has anyone experienced a similar situation?

BBill, Feb, 2014

Consult with a tax lawyer, enrolled agent, certified tax preparer, or accountant for a second opinion.

SSTEVEN, Feb, 2014

I've refinanced three or four times and I did a short sale in 2013. What would be the formula for what would be eligible for the Mortgage Forgiveness Act? My original purchase price in 1994 was $125,000. The debt they have forgiven is $192,000.

BBill, Feb, 2014

If this is regarding your primary residence, then I believe that you can exclude the entire amount forgiven. I recommend that you file your taxes this with a tax professional familiar with the IRS Form 982 and the provisions of the MFDRA.

CCarolyn, Jan, 2014

My home was foreclosed on in 2008. I worked with the lender to complete the process. The amount financed was $504,000 and after my foreclosure, the home was sold for $199,000. Am I still liable for paying taxes on the difference ($305,000) if I was protected by the 2007 Mortgage Debt Relief Act?

BBill, Jan, 2014

Based on the information you provided, it appears you qualify for the Mortgage Forgiveness Debt Relief Act. If you qualify, you have no tax liability for the cancelled debt income. Consult with an experienced tax preparer to review your entire situation, as there may be facts you didn't mention that are relevant to this analysis.

BBarb, Nov, 2013

I have been scouring the Internet for information on a possible extension of the MFDRA and can find nothing except for an article that states that Congress is too preoccupied with Obamacare to focus on the ramifications for Americans, like myself, that would suffer financially from the expiration of the bill this December. Can you give any information that might offer some hope?

BBill, Nov, 2013

The only hope we can offer is last year at this time it appeared Congress was ignoring MFDRA and through inaction would allow MFDRA to lapse. Here we are a year later and congressional behavior seems even worse. Does this mean our senators and representatives will cooperate and extend MFDRA again like they did last year? Hope springs eternal.

DD, Jun, 2013

I have been attempting to sell my home, in Maryland, through a Short Sale. My mortgage lender has offered me a "deed in lieu." Will I still qualify for the Mortgage Relief Act which was extended through 2013, assuming the paperwork is complete prior to December 31st?Thank you.

BBill, Jun, 2013

Review the terms of the contract your home loan lender offers you. Will it be forgiving the deficiency balance and issuing you a 1099-C? If so, then the amount forgiven should be subject to MFDRA. However, if the terms of the contract are vague as to the status of the deficiency balance, then you are leaving yourself open to the lender seeking to collect the deficiency balance from you.

Consult with a Maryland lawyer who has experience negotiating with mortgage lenders if the contract's terms and conditions are vague or confusing.