Normally, one would have to pay taxes anytime a past debt is forgiven in an amount that is over $600. However, there is a special exemption that exists that keeps people from paying taxes when the debt forgiven is related to losing their home. There are several common misconceptions that are good for everyone to know whether you are a current homeowner or a former homeowner.
The test to qualify for the special tax treatment is that the debt that has been canceled must have been used by you “to buy, build or substantially improve your principal residence.”
- The house cannot be your second home; it must be your primary residence.
- The debt can only be for acquiring or constructing a house and making capital improvements to the house; it cannot have been for non-qualifying purposes, such as refinanced mortgage debt used for kid’s tuition, buying cars, or paying off credit cards.
- If you do refinance your mortgage with non-qualifying debt, you will only get the difference in the tax exemption.
- The mortgage cancellation relief is capped at $2 million for singles and married taxpayers, $1 million for married owners filing separately.
- The form on the IRS website, irs.gov, is Form 982 and Publication 4681
If you would like to learn more and/or receive assistance with loan modification or foreclosure, please contact us at (857) 244-1940 or fill out the form on the right.
