How does the expiration of the Mortgage Debt Relief Act next year affect you?
Individuals who lost their homes through property foreclosed will not have to pay earnings tax on the amount of mortgage debts that was pardoned or ended. Tax-free treatment is also available to people who updated their house mortgages loans for a lower balance.
The tax-free exemption relates to ended mortgage debts of up to $2 thousand (or $1 thousand is wedded and processing a individual return). There are additional details to consider to be eligible for a this tax exemption. The house must have been used as a main home, which means it was the major place of property for the person. Also, the debts must have been used to buy, develop, or make substantial improvements to the property.
Some mortgage debts won't be eligible for a this tax-free exemption and will be considered taxed earnings. Loans that don't are eligible include hel-home equity loans where the proceeds were not used to buy, develop, or improve the property. Also, home mortgages for second houses and rental properties do not be eligible for a the exemption. However, some or all of this debts might be eligible for a other exceptions.
The IRS explains the tax break this way: "Taxpayers can remove up to $2 thousand of debts pardoned on their major property. The limit is $1 thousand for a wedded person processing a individual come back. This provision relates to debts pardoned in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debts pardoned in connection with a property foreclosed be eligible for a this comfort." (Source: IRS.gov)
Individuals who be eligible for a this tax comfort will need to use Form 982 to report the ended debts.