Did you know that if your home is foreclosed on or voluntarily returned to the lender you could owe taxes on the sale of the property? According to the IRS, if the outstanding loan balance was more than the Fair Market Value of the property and the lender agreed to cancel all or part of your debt, the IRS treats that cancellation as income to you? Furthermore, you are responsible for reporting the sale of the property to the IRS, for the tax year of the sale, when it does sell.
Many homeowners are not aware that when they sell their home on a short sale or modify their loan amount they may have to pay taxes to the government on the amount of money the mortgage company lost. Thankfully, as part of the Mortgage Forgiveness Debt Relief Act of 2007, congress enacted legislation allowing certain taxpayers to receive special tax relief if they qualify and fill out all the supporting forms.
While the Mortgage Forgiveness Debt Relief Act and Debt Cancellation was originally enacted to cover tax years 2007, 2008 and 2009, it now applies to certain debts from 2007 through 2012. The IRS does not relieve the homeowner from the responsibility of making sure that the information on the 1099-C is correct. It is the responsibility of the person receiving the 1099-C to contact their lender and have the lender correct any amounts that are not accurate.
Not all debts are forgiven, according to the IRS, debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. Bottom line, get help from a tax preparer or a least a good electronic software product to make sure you file all the necessary forms and documents.