If you got a 1099-C From your Mortgage Company, Certain Rules May Apply

OK, people, the 1099-C can cause a heart-attack, especially if you are doing your own taxes and you don't understand what to do with it.

You believe you understand the tax laws enough to do your own taxes. You have done your taxes in the past and there has never been a problem. You fully realize that a 1099-C, 1099-MISC, 1099-INT, or 1099 for that matter is what the IRS calls "Income"

Except now, you have this 1099-C (which stands for debt cancellation) that your Mortgage Company sent to you. Until now, you weren't worried because there was a short sale, or the bank foreclosed on your house.

Yet, when you go to do your taxes, and you follow all the rules that the tax software tells you, you find that you end up owing anywhere from $30,000 to $70,000 in taxes. (This is where the heart attack could come in, if you hadn't read this blog)

My advice is to find a local tax professional who can help you. If you are still on your high horses and refuse to get professional help, then you can read the announcement the IRS put out to help you understand how to handle a 1099-C. However, my suggestion still remains the same. It would be best if you got this situation handled by a professional. There are a lot of wrong turns you can take on the path to eliminating $50,000 in owed taxes!

Mortgage Debt Forgiveness: 10 Key Points

Canceled debt is normally taxable to you, but there are exceptions. One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.

The IRS would like you to know these 10 facts about Mortgage Debt Forgiveness:

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.

9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit www.irs.gov. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, is also an excellent resource.