The mortgage debt relief act is set to expire at the end of 2012.Prior to 2007 the IRS considered forgiven debt on ones primary residence as taxable income. For example, If you owed $100,000.00 on your residence and sold it short of the full amount owed; say for $80,000.00, the difference, $20,000.00 was considered taxable income.
The mortgage debt relief Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. To qualify, the debt must be secured by the home.
This is known as qualified principal residence indebtedness. This provision applies to debt forgiven in calendar years 2007 through 2012. The maximum amount you can treat as qualified principal residence indebtedness is $2 million if filing jointly or $1 million if filing individually.
Any debt reduced through mortgage restructuring, a short sale as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
There are other exclusions under the mortgage debt relief act including bankruptcy and insolvency. The act applies to most homeowners but to make sure you qualify you are advised to Seek the advice of a qualified tax Professional.
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