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Good morning. I have good news for you...no tax impact! First, although typically debt forgiveness results in taxable income
, under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions. The law
has now been extended through the end of December 2013. Second, Arizona is a non-deficiency state where you would not have personal liability for the shortfall. You only have debt forgiveness where you have a recourse loan. If nonrecourse, you are not being forgiven because you owe nothing personally. In some cases, although inappropriate for the lender to issue a 1099-C in a non-recourse state...which is the notice the IRS is given that there has been forgiven....some lenders nonetheless issue them. Should yours do so, you can contest the 1099-C or File the Form 982. Typically in these situations, the Form 982 is the path of least resistance.
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