Mortgage Forgiveness Debt Relief Act of 2007

If you were upside down in mortgage debt and had a portion of your mortgage forgiven, either through a loan workout or after a foreclosure, you would normally be hit with taxes on the amount of debt forgiven. In other words, debt forgiven means taxable income.

But thanks to the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence.

The current law applies to debt forgiven in 2007, 2008 or 2009, however, the Wall Street Bailout Bill enacted in October 2008 extended this relief through 2012.

Debt reduced via mortgage restructuring plans, like mortgage debt forgiven after a foreclosure, both can qualify for this exemption of income. There are certain additional requirements for eligibility:

1. 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.

2. 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 the refinancing.

In some cases, debt arising from insolvency, and in general, debts discharged in bankruptcy, are permitted to be exempted from taxable income.

Mortgage holders whose debt is reduced or eliminated will receive a year-end statement (Form 1099-C) from their creditor. For debt canceled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form needs to show the amount of debt that is being forgiven plus the fair market value of property given up in foreclosure.

Let TurboTax Online help you this year when it's time to file your taxes.