Michelle Singletary, in her Washington Post/Bloomberg column, says that time is running out for troubled homeowners who want to take advantage of the Mortgage Forgiveness Debt Relief Act of 2007. It was enacted by Congress to provide some consolation to folks who lost their homes, but it’s complicated.
If you borrow money and the lender then cancels or forgives the debt, you generally have to include the canceled amount as income for tax purposes. As the IRS explains, you aren’t taxed on borrowed money because you have an obligation to repay it. However, if the debt is wiped out, the lender is then required to report the amount of canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
You can imagine the frustration that many people had with this seemingly unfair tax rule. They had lost their homes and then discovered in a “you’ve-got-to-be-kidding-me” moment that they owed taxes on the forgiven debt.
That’s where the mortgage debt relief act comes in. It allows people to exclude income from the discharge of debt on their principal place of residence. In addition to foreclosure, debt reduced because of a mortgage restructuring also qualifies for relief under the new law.
As always, there’s a catch.
Read Michelle Singletary’s entire column at Washington Post/Bloomberg.