If your lender canceled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012. The IRS has released some facts about mortgage debt forgiveness. Canceled debt normally results in taxable income, but you may be able to exclude the canceled debt from your income if the debt was a mortgage on your main home.
To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage. The maximum qualified debt that you can exclude under this exemption is $2 million. The limit is $1 million for a married person who files a separate tax return.
You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt canceled in a foreclosure. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing. Proceeds of refinanced mortgage debt used for other purposes do not qualify for this exclusion.
For example, debt used to pay off credit card debt does not qualify. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due To Discharge of Indebtedness. Submit the completed form with your federal income tax return.
Other types of canceled that do not qualify for this special exclusion. This includes debt canceled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about those provisions. If your lender reduced or canceled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of canceled debt and the fair market value of any foreclosed property. Finally, check your Form 1099-C for the canceled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form. But here you go: http://www.IRS.gov/U AC/newsroom/important-fax-about-mortgage-debt-forgiveness.