8 Tax Tips about Debt Cancellation

Atlanta Tax Lawyers

If your lender cancels part or all of your debt, it is usually considered income, and you normally must pay tax on that amount. However, the law allows an exclusion that may apply to homeowners who had their mortgage debt cancelled in 2015.

Key Tips About Debt Cancellation

1. Main Home

If the cancelled debt was a loan on your main home, you may be able to exclude the cancelled amount from your income. You must have used the loan to buy, build, or substantially improve your main home to qualify. Your main home must also secure the mortgage.

2. Loan Modification

If your lender cancelled part of your mortgage through a loan modification or ‘workout,’ you may be able to exclude that amount from your income. You may also be able to exclude debt discharged as part of the Home Affordable Modification Program (HAMP). The exclusion may also apply to the amount of debt cancelled in a foreclosure.

3. Refinanced Mortgage

The exclusion may apply to amounts cancelled on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build, or substantially improve your main home and only up to the amount of the old mortgage principal just before refinancing. Amounts used for other purposes do not qualify.

4. Other Cancelled Debt

Other types of cancelled debt such as:

• Second homes

• Rental and business property

• Credit card debt

• Car loans

These do not qualify for this special exclusion. However, there are other rules that may allow those types of cancelled debts to be nontaxable.

5. Form 1099-C

If your lender reduced or cancelled at least $600 of your debt, you should receive Form 1099-C, Cancellation of Debt, by February 1. This form shows the amount of cancelled debt and other information.

6. Form 982

If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. File the form with your federal income tax return.

7. IRS.gov Tool

Use the Interactive Tax Assistant tool on IRS.gov to find out if your cancelled mortgage debt is taxable.

8. Exclusion Extended

The law that authorized the exclusion of cancelled debt from income was extended through December 31.