Mortgage debt cancellation relief. Who qualifies?

Mortgage debt cancellation relief. Who qualifies?

What is mortgage debt cancellation relief and who qualifies for it? It is a law that will protect individuals and families who have had a foreclosure or a short sale on their primary residence (you must have lived there for 2 of the past 5 years) between January 1, 2007 and December 31, 2009 by eliminating your requirement to pay taxes on the forgiven debt. In layman’s terms it means that the bank cannot file a 1099 on you for “earned income” on what ever amount they lost on the transaction. Previously, homeowners were required to pay the taxes on this “phantom income” and that had caused even more hardship.

There are a few guidelines.

• There is no income limit. All borrowers receive the relief, no matter what their personal income.
• The amount of debt eligible for forgiveness is $1 million per person.
• Relief will only apply to an individuals principal residence (you must have lived there for 2 of the last 5 years.)
• Eligible debt is what is called “acquisition indebtedness,” This is debt used to acquire, construct or rehabilitate a residence. (If the money from a second mortgage or home equity line of credit was used to improve the home you need to have adequate proof to this end.)
• No relief is available for cash-outs, whether the cash-out takes the form of a refinanced first mortgage, a second mortgage, home equity line of credit or a similar arrangement. (An exception of refinanced debt is when the refinanced portion does not exceed the original amount borrowed.)
  

Basically, this is meant to drastically reduce or eliminate any tax consequences for borrowers on their own homes. For people who purchased second homes or used their HELOC (home equity line of credit) for things other than home improvement projects, you will not qualify, but there may be other things that your tax professional can do to help you.