Important Information Regarding the Mortgage Forgiveness Debt Relief Act and Debt Cancellation

February 09, 2009 – (RealEstateRama) — If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This federal provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). 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.

The link provided below will direct you to additional information on the U.S. Internal Revenue Service website. It provides answers to frequently asked questions, as well as forms and contact information.