Tax Tip: Mortgage Forgiveness Debt Relief Act of 2007

Tax Cat knows that it’s a hard subject, but if your home has been foreclosed there’s something you should know about changes to the tax laws.

Tax laws consider forgiven debt as income, which can leave those of you with foreclosed homes with some unexpected tax bills this year. Let’s say I loan you a million bazillion dollars. Now I go, “Oh, wait. Never mind. You can keep it.” The IRS considers that income. You would have to pay the taxes on your million bazillion dollars.

The tricky part comes in when I’m not just loaning you a million bazillion dollars. I’m loaning you money to buy an overpriced home that you can’t afford and I can’t sell for as much as you owe me once I take it back from you.

Enter the Mortgage Forgiveness Debt Relief Act of 2007. Bankrate sums it up for us:

Under the Mortgage Debt Forgiveness Act of 2007, some homeowners granted forgiveness of mortgage debt won’t have to pay taxes on that amount. But there are some restrictions:

1. There is a limit on the forgiven debt: up to $2 million or $1 million for a married person filing a separate return.
2. The tax break also has a time limit. It only applies to mortgage debt discharged by a lender in 2007, 2008 or 2009.
3. The loan also must have been taken out to buy or build a primary residence, not a second or vacation home. If debt is forgiven on those additional properties, the owner will owe cancellation of debt income as usual.

This new law comes with a brand new form, Form 982. For those of you who wish to file electronically, make sure to update your tax software and… oh yeah. Since this law is so new you’re going to have to wait until March 3 before the Death Star is fully operational. The IRS won’t be ready to accept electronic returns with Form 982 until that date.

10 Tax Laws You Just Gotta Know [Bankrate]
IRS Form 982 (PDF) [IRS]
March 3: The latest tax-filing deadline [Don't Mess With Taxes]
(Photo:Chad Beckerman)

Comments

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  1. covaro says:

    How many zeroes would there be in “a million bazillion dollars”?

  2. Meg Marco says:

    @covaro: A bazillion.

  3. descend says:

    How is the real estate crisis going to be helped by giving people even more incentive to walk away from their homes?

  4. gamehendge2000 says:

    i wouldn’t go so far as to cell this an incentive to walk away from your mortgage

  5. laserjobs says:

    This makes it nice and easy to walk away from that underwater shack. Why would anyone want to be a debt slave?

  6. CumaeanSibyl says:

    Yay, Tax Cat.

  7. NotATool says:

    Crap, so much for writing off the taxes on my foreclosed vacation home. Bastards.

  8. RevRagnarok says:

    @Meg Marco: “Math is hard.” It would be 6+log10(bazillion). ;)

    I want to see extra relief for “you were stuck with two houses for six months so was carrying four mortgages because you couldn’t sell.”

  9. JimiSlew says:

    “Death Star”… Chuckle.

  10. GRRR! Here I am. I pay my bills. On time. I pay my student loans, on time. I pay my rent, on time. I scrimp and save. Where’s my tax/responsibility avoidance scheme? This is right up there with that traitor to the national interest, Roni Deutch, who will settle your DEBT to your GOVERNMENT for pennies on the dollar.

    Does anyone realize that when they first instituted the federal income tax, people were happy to pay it. They felt patriotic. And you know what, it’s still patriotic to pay your taxes. They support our troops.

    And oh yeah, by getting around what you actually OWE, you shift the burden on the good people like me who actually pay taxes and earn livings and don’t walk out on their debts.

    Nuke their credit ratings and impeach the IRS officials behind this (oh, and Congress too).

  11. mike says:

    @PotKettleBlack: My golly! I totally agree.

    Why should people who are diligent in paying bills, making money, pay for people who were too stupid and/or too naive to know any better?

  12. loueloui says:

    2 MILLION DOLLARS! How about we make this a more reasonable $500,000, and not bail out these idiots who helped contribute to this mess by flipping a bunch of properties?

  13. descend says:

    @gamehendge2000:

    Under what definition of “incentive” does this not qualify?

  14. I want to clarify. I’m in favor of bailing out people who were victims of predatory lending, fraud, obfuscation or other dark shade of gray stuff. But walking out on your mortgage and (legally) dodging the tax on your income (and yes, wiping out a debt and maintaining the same revenue is pure profit), is simply shifting the burden onto the fiscally good people of the world like most of the readers of Consumerist.

    It’s enough to make someone vote Republican. Of course, you’d have to ignore the social backwardness and the TREASON of pursuing borrow and spend policies to further enrich their donors.

  15. doc10house says:

    Have to weigh in here.

    I’m a physician. I earned in excess of 220,000 dollars per year, and I came by it honestly. I lost that job and with it, my earning potential. For the past 19 months I’ve been on pace to earn roughly a tenth that amount. I may soon have another, but that year and a half of squalor was more than enough to wipe out any savings many times over. So much for getting my 16 year old son into college without scholarships. So much for health insurance, or being able to fix a car that won’t run.

    Needless to say, the 289000 dollars I still owed the fine folks (?) at Chase for my home fell victim to foreclosure. Had I to pay tax on that as income this year, my tax bill would far exceed my actual (gross) annual earnings.

    I’ve been through 12 years of post-high school education. That doesn’t get done if one isn’t a hard worker, or committed to paying one’s debts. Not everyone who abandons a debt is lazy or stupid. Some are terribly unlucky.

    Thank God for this change.