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on Newly-Revised IRS Form

IR-2008-17, Feb. 12, 2008


WASHINGTON — Homeowners whose mortgage debt was partly or entirely forgiven
during 2007 may be able to claim special tax relief by filling out newly-revised Form 982
and attaching it to their 2007 federal income tax return, according to the Internal
Revenue Service.
Normally, debt forgiveness results in taxable income. But under the Mortgage
Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt
forgiven on their principal residence if the balance of their loan was less than $2 million.
The limit is $1 million for a married person filing a separate return. Details are on Form
982 and its instructions, available now on IRS.gov.

“The new law contains important provisions for struggling homeowners,” said Acting IRS
Commissioner Linda Stiff. “We urge people with mortgage problems to take full
advantage of the valuable tax relief available.”

The late-December enactment means that reporting procedures for this law change were
not incorporated into tax-preparation software or IRS forms. For that reason, people
using tax software should check with their provider for updates that include the revised
Form 982. Similarly, the IRS is now updating its systems and expects to begin accepting
electronically-filed returns that include Form 982 by March 3. The paper Form 982 is now
being accepted, but the IRS reminds affected taxpayers to consider filing electronically,
which greatly reduces errors and speeds refunds.

The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through
mortgage restructuring, as well as mortgage debt forgiven in connection with a
foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill
out a few lines on Form 982 (specifically, lines 1e, 2 and 10b).

The debt must have been used to buy, build or substantially improve the taxpayer's
principal residence and must have been secured by that residence. Debt used to
refinance qualifying debt is also eligible for the exclusion, but only up to the amount of
the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car
loans does not qualify for the new tax-relief provision. In some cases, however, other
kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for
details.

Borrowers whose debt is reduced or eliminated receive a year-end statement (Form
1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide
this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of
debt forgiven and the fair market value of any property given up through foreclosure.

The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender
immediately if any of the information shown is incorrect. Borrowers should pay particular
attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box
7).

Related Items:

  • Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness
  • 1099-C