Cancellation of a loan or debt because of foreclosure or immediate short sale at a loss can continue to be a hefty burden on the pocket because of the large amount of taxes involved. Losing your property at a lower price already places a dent on your financial standings, and the added baggage of taxes that you need to pay for the full amount can prove to be an unaffordable payment every month.
Keeping in mind these issues, the ‘Mortgage Forgiveness Debt Relief Act’ was introduced in the year 2007. So far it has proven to be a blessing in disguise for all those people who were facing tax payment problems on their loans that had been cancelled by their banks. Debt settlement can become easy and you can save up to thousands of dollars that you pay in taxes by taking advantage from this law while it lasts.
What is meant by the ‘Mortgage Forgiveness Debt Relief Act’?
The act was officially passed by the government by the end of December 2007 to facilitate those who were struggling with their cancelled loans, particularly in the event of a short sale or foreclosure. The act gives the liberty to such individuals by reporting their cancelled loans and debts to the authorities as ‘income’ and thus they can refrain from paying taxes on the entire loan amount.
For example, if your mortgage loan was higher than the price you sold your property for, you can cancel out the amount that you have lost and thus refrain from paying taxes on it.
Who is Eligible for it?
In order to take full advantage of this act, you need to fulfill the following basic requirements.
· The loan cancelled should be the debt for your main property or primary residence. Foreclosed rented property does not qualify under this act.
· The forgiven amount should be less than $2 million.
· The date of discharge of the debt should be after the 01st of January 2007. Hence, only the debts that were cancelled between 2007 to present are eligible.
· The debt should have been used entirely to purchase the property. But if the debt has been used for extensive repair, maintenance and improvement of the house, then it is also permissible.
· Refinancing, if equal to the balance of the original mortgage and used for building or maintaining the house, also falls under the act and can be relieved of taxes.
Which Debts Qualify for this Act?
The law states clearly that this act is liable for those debts that have been cancelled or forgiven due to short sale or foreclosure of the property. Therefore, in case of short sale, the difference between the amount you owed and the price that the property is sold for is waived of taxes under this act.
Similarly, in case of foreclosure, the amount remaining on the mortgage, which would normally have been considered as income, is relieved of taxation. Thus, with the help of this act, settlement of debt is made easy for the customer and scores of consumers can successfully avoid any chances of bankruptcy.
How Can You Apply For the Act?
The procedure for registering your cancelled debt as income is fairly easy and straightforward. First of all, your lender has to contact the Internal Revenue Service (IRS), fill a form with details about the type of your loan, state its full amount, state the amount of the debt that is cancelled, and state the tax return.
This form will then get forwarded to you and you can check on the details and confirm that they are correct. After the completion, you will be taxed only for the amount that you are eligible for after the cancellation of your loan.
This act is only active till the end of this year, Therefore, you need to file your request for any canceled and completed debt before this deadline. This Debt Relief Act has been specifically designed to aid and facilitate the scores of people that were indebted for a high share of money even after selling their property. Thus it can help you in saving your hard-earned cash over unnecessary tax amounts.