When a citizen has a debt forgiven or canceled, the Internal Revenue Service generally considers the amount as income. The taxable amount is reported to the IRS either as business or private income. As of September 2010, once the lender forgives $600 or more in debt, the firm forgiving the debt finishes IRS form 1099-C,”Cancellation of Debt,” and sends it to the IRS. Sometimes a homeowner may be eligible for an exemption from tax penalties following a foreclosure.
When a home is foreclosed or voluntarily returned to the lender, the IRS treats the transaction as a type of sale which may lead to a loss or gain for the homeowner. To calculate average income on the foreclosure, and the homeowner should subtract the fair market value of their property from his outstanding debt at the time that the property was transferred. Any proceeds the homeowner receives from the foreclosure sale should get added to the normal revenue figure. Every time a negative amount exists, it’s considered a loss from the foreclosure, and instead of a gain. Individual owners report this information to the IRS using IRS Form 1040,”Standard Income Tax Return” Business owners report that their information on IRS Schedule C,”Profit or Loss from Business.”
Homeowners who file a Title 11 bankruptcy and include their foreclosure are exempt from an income tax penalty for foreclosure. A Title 11 bankruptcy comprises Chapters 7, 11 and 13. To report that the tax exception, the homeowner must file IRS Form 982,”Reduction of Tax Attributes Due to Discharge of Indebtedness,” along with IRS Form 1040,”Standard Income Tax Return” The homeowner will need a figure for the total amount of debt discharged in his bankruptcy to document line two of the form.
Mortgage Forgiveness Debt Relief Act Exemption
In December of 2007, the Mortgage Forgiveness Debt Relief Act was enacted as a response to the housing crisis in the U.S.. The exemption applies to foreclosed homeowners with debts forgiven between 2007 and 2012. Qualified homeowners who undergo a foreclosure of their main residence won’t obtain an income tax penalty from the IRS. The IRS also forgives debt decreased through preforeclosure loan restructuring and second loans or refinancing related to significant improvements to the home. The maximum amount a homeowner may claim is $2 million or, for married persons filing separately, $1 million. To report that the tax exception, the homeowner must file IRS Form 982,”Reduction of Tax Attributes Due to Discharge of Indebtedness,” along withIRS Form 1040,”Standard Income Tax Return”