Acting IRS Commissioner Linda Stiff stated, “We urge people with mortgage problems to take full advantage of the valuable tax relief available.”
Normally, debt forgiveness results in taxable income. But 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 debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before refinancing.
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief under Mortgage Forgiveness Debt Relief Act. In some cases however, other kinds of tax relief may be available, for example relief based on insolvency or bankruptcy.