1099-C form. This is because the Lender decided it cannot recover what they owe on their mortgage loan and is therefore canceling or forgiving a portion of that debt.
The part of the mortgage debt that is canceled is generally the difference between what was owed on the mortgage loan and the payoff to the bank. Prior to 2007, many financially strapped taxpayers with forgiven mortgage debt were required to pay federal taxes on it, because the IRS treated it as taxable income. Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, most borrowers whose mortgage debt on their primary residence that is cancelled between Jan. 1, 2007 and the end of 2013 will not have to pay federal taxes on it.
Note that not all states follow the new federal law. Therefore, some people could still owe state taxes on canceled debt. Lucky for us, Florida has no state income tax so federal law applies :-)
Here are the requirements:
- The debt must be on your primary residence, not a vacation home or rental property.
- The debt forgiven can be up to $2 million. But for married persons filing separate returns, the limit is $1 million.
- Not all canceled mortgage debt qualifies. The mortgage must have been used to acquire or construct your home, or to improve it. It can also be a mortgage that was refinanced, but only up to the amount of the old mortgage principal, just before the refinancing. If you "cashed out" some of your home equity for purposes other than home improvements, such as buying a car, that portion of your forgiven debt is taxable.
- The debt forgiveness occurred on or after Jan. 1, 2007.
*As always, seek the advice of a qualified tax professional when filing taxes.
