Tag Archives: Cancellation of Debt

Mortgage Forgiveness Debt Relief Act

Mortgage Forgiveness Debt Relief Act

The Mortgage Forgiveness Debt Relief Act recently extended to cover tax years 2015 and 2016.  https://www.nar.realtor/news-releases/2015/12/national-association-of-realtors-applaud-passage-of-tax-extenders-package

Does the cancellation of a debt result in taxable income?  Yes, if you owe a debt  to someone and they cancel or forgive that debt, the canceled amount may be taxable income to you.   Some exceptions to this general rule were set forth in my earlier blog post on this subject. The taxpayer should receive a 1099-C Cancellation of Debt.  This cancellation of debt is also reported to the IRS.

However, there is some good news for homeowners who have gone through a mortgage foreclosure or short sale.  In December 2007, Congress enacted the The Mortgage  Forgiveness Debt Relief Act of 2007.   Generally, the Act allows taxpayers to exclude income from the discharge of debt on their principal residence as the result of a mortgage modification, mortgage foreclosure or short sale. The Act applies to  up to $2 million of mortgage debt ($1 million if married filing separately) forgiven in calendar years 2007 through 2013. Subsequently, Congress extended the Act to mortgage debt forgiven in tax year 2014.

Contact Chicago CPA and attorney Brian J. Thompson for legal advice re the Mortgage Forgiveness Debt Relief Act.

Form 1099-C Cancellation of Debt

IRS Form 1099-C

Did you receive a Form 1099-C this year?  Chicago CPA and business lawyer Brian J. Thompson wants you to know that Form 1099-C is used to report Income from Cancellation of Debt.

The general rule is if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable income.

There are some exceptions to the general rule.  The most common circumstances when cancellation of debt income is not taxable involve:

  1. Qualified principal residence indebtedness:  This is the exception created by the Mortgage Debt Relief Act of 2007; it applies to most homeowners.
  2. Bankruptcy:  Debts discharged through bankruptcy are not considered taxable income.
  3. Insolvency:  If you are insolvent (i.e., your total debts are more than the fair market value of your total assets) when the debt is canceled, some or all of the canceled debt may not be taxable income to you.
  4. Non-recourse loans:  A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.  In other words, the lender cannot pursue you personally in case of default.  Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
  5. Certain farm debts.