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What the mortgage company rep told you was incorrect. The IRS receives copies of all 1099 forms that are issued and you will have to account for this on your tax return.
Normally when you have a debt that is canceled or forgiven, you are responsible for paying taxes on the amount of the forgiven loan. However, due to the recent mortgage lending crisis in our country, Congress has enacted temporary legislation which allows taxpayers to exclude canceled debt from a foreclosure on their primary home from being taxable income.
The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain canceled debt on your principal residence from your income. It applies to mortgage debts that are canceled during the calendar years of 2007 through 2011 . You would still receive a 1099-C form from your bank showing the amount of the debt that was canceled, but you will file Form 982 which you attach to your tax return, and claim an exclusion for paying taxes under this new law.
You simply need to file Form 982 with your tax return. Check the box on line 1e showing that you are claiming exclusion of debt on your principal residence. And then on line #2, enter the amount of the canceled debt as shown in box #2 of the 1099-C form. You will then not need to pay taxes on this forgiven debt.
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