Mortgage Forgiveness Act
Article by Mortgage Guru
When the economy took a sharp downturn recently, many homeowners faced the dilemma of paying off their mortgages. Job losses, reduced income and a significant decrease in property value have caused many homeowners to be behind in their mortgage payments. Some even went to the extent of becoming delinquent. Many homeowners had to negotiate with their mortgage providers to reduce their debts or at least work out a new repayment scheme that suits their currently financial capabilities. To make matters worse, even if they manage to get their mortgagers to cancel or forgive their mortgage they may even have to pay taxes on the canceled amount. This is where the Mortgage Forgiveness Act comes in.The Mortgage Forgiveness Act was drafted in 2007 and it protects homeowners from having to pay taxes on the income from the discharge of their mortgages. Generally homeowners may have reached an agreement with their lenders to cancel or forgive the balance amount of mortgage that is still owed to them. Previously forgiven debts and mortgages may have been considered as an income and they were required to pay taxes on the amount canceled by the bank. Nowadays under the protection of the Act lenders who have forgiven a debt may show taxpayers and the IRS the amount that is forgiven but homeowners may avoid losing their homes and yet still have to pay taxes on the forgive mortgage amount.When a mortgage provider forgives your debt you know you have managed to stop foreclosure on a mortgage that you own. You may want to bear in mind that not all cancellation of debts income are taxable. There may be mortgage cancellations that fall under the category of non-taxable income such as bankruptcy. In general, if you have had your debts discharged through bankruptcy the Act protects you from having to pay taxes on your mortgage cancellations. In essence, an exclusion of income means you may be allowed to exclude your forgiven debts as taxable income. However, you might want to bear in mind that not all mortgage cancelations may fall under the protection of the act. This is because the Act may only apply to forgiven debts that are used to buy or remodel your principal residence. Generally the Act was developed in 2007 and may be in effect up to year 2012. For the moment, there may be no dollar limit on the amount of forgiven qualified principal residence. Of course, you may have to report the forgiven debt on your tax return. The Act was also designed to provide foreclosure assistance to homeowners who may be on the brink of losing their homes. This is why the Act may not cover forgiven mortgages on second homes, credit card or car loans. You may first need to find out how much debts were forgiven from your mortgager because there may be a limit of million on the amount of debt that may be protected under this Act. However, married taxpayers who file their tax returns separately may exclude up to million each. When it comes to mortgages in times of recession or economic downturn, many homeowners may find the Act to be very helpful. Although you may be required to show the amount forgiven to the IRS you may want to prepare good notes and meet up with your lender prior to tax time to obtain relevant information and documentation that you may need.
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