Mortgage Debt Reduction Tax Relief

As part of President Obama???s legislation, the IRS is not taxing mortgage forgiveness on a temporary, limited basis.?? The current tax code states that any mortgage forgiveness in excess of $600 will be reported to the IRS as ordinary taxable income.?? So, if the taxpayer received a $20,000 mortgage balance reduction, the IRS would ordinarily tax that $20,000 as income.?? In order to qualify for this tax exclusion, the principal reduction (if keeping the home) or the sale amount (if selling the home as a short-sale) must be strictly made on primary residences ??? investment properties and second homes do not qualify.?? Refinanced mortgages on primary residences also qualify assuming the homeowner refinanced the actual mortgage balance or if the homeowner did take cash out, it was to make home improvements.?? Refinanced mortgages where cash was taken out for that luxury vacation or new car do not qualify.?? Of course, home improvement purchases will need to be well-documented.?? And, if the homeowner receives mortgage reduction and continues to reside in the home, the IRS will require the homeowner to lower his cost basis.

Please bear in mind; this is at the federal level.?? At the state level, California does not exempt these losses from being taxed as ordinary income.?? There is legislation waiting for the Governor to sign to conform to the federal practice, but has yet to come to fruition.

If you want to claim the debt forgiveness, please visit and download Form 982. Again, this is temporary tax relief.?? It is set to expire at the end of 2012.


Source:?? ???Tax Relief Available for Debt Reduction??? by Kenneth R. Harney and Roger Showley San Diego Union Tribune, March 14, 2010