Q: Earlier this year, the bank foreclosed on my home. How do I report this on my taxes?
A: Unfortunately financial crisis can happen in your life that can’t be avoided, but if you experienced a foreclosure, short sale, or loan modification, you may get some relief and be able to exclude the debt forgiven on your principal residence from your income.
Prior to the Mortgage Forgiveness Debt Relief Act, taxpayers were required to include forgiven debt from foreclosure, short sale, or loan modification in their income at tax-time, but thanks to the extension of the Mortgage Forgiveness Debt Relief Act you are allowed to exclude the debt discharged on your principal residence from your taxable income up to $2 million ($1 million MFS).
Here are some things you need to know in order for your forgiven home mortgage debt to be tax-free:
- Your forgiven debt must be debt secured by your primary residence.
- Amounts borrowed that were not used to remodel, acquire, or build your principal residence do not qualify.
- There is a $2 million ($1 million MFS) limit on the amount that qualifies for exclusion.
- The law applies to refinanced home loans as well.
- The law only applies to mortgage debt and not other debt forgiveness.
- The Mortgage Debt Relief Act was extended through December 31, 2016 and applies to discharges of qualified principal residence indebtedness before January 1, 2017.
- The extended provision also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2017, but a written agreement was entered into in 2016.
Typically the Mortgage Forgiveness Debt Relief Act has been extended in the past. We don’t know when or if the provision will be extended again, but you can take comfort in knowing that if you have discharged qualified principal residence indebtedness this year you will be able to exclude it from your taxable income.
If you receive a Form 1099-C from your lender to report the cancellation of mortgage debt, don’t worry. TurboTax will ask you simple questions about the cancellation of debt and enter the information on the correct forms based on your answers so you are not taxed on the forgiven debt on your home.
Don’t forget to check back with the TurboTax blog to find out the latest updates on the Mortgage Forgiveness Debt Relief Act.