Taxpayer asks:
I have a 1099-c from a short sale on my house, I was hoping to be granted an exemption because of the Mortgage Forgiveness act of 2007, my amount in box 2 is 54809 and the amount in box 7 is 0.00 not sure what all this means.
Taxgirl says:
A form 1099-C is a form issued by a lender when a debt is forgiven. For forms 1099-C related to the forgiveness of debt related to real estate, the amount of debt forgiven is listed in box 2 (that’s the $54,809 you mentioned) and the value listed for your home is listed in box 7.
Normally, the forgiveness of debt results in income which is reportable and taxable on your federal income tax return. However, as you noted, the Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA) allows an exclusion up to $2 million (or $1 million MFS) of debt forgiven on your principal residence for qualified taxpayers. This applies to tax years 2007 to 2012.
To qualify, the debt must have been used to “buy, build or substantially improve your principal residence” and the mortgage must be secured by the principal residence. A re-fi used for those purposes would also qualify. However, to the extent that you used the proceeds from a mortgage or a re-fi for other things – like paying off personal debt or credit cards – the exclusion does not apply. Additionally, forgiven debt on second homes or business properties, car loans and other personal interest loans does not qualify under the MFDRA.
If you qualify, you must attach a completed federal form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (available here as a pdf), to your federal income tax return. Complete lines 1e and 2 to report indebtedness due to a foreclosure. If you kept your home but received a form 1099-C due to a modification in the terms of your mortgage, complete lines 1e, 2, and 10b.
I hope that helps.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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