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, or
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 or car loans do not qualify for this special exclusion. On the
other hand, 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 Feb. 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 Dec. 31, 2016.
9. IRS Free File. IRS
e-file is fastest, safest and easiest way to file. You can use IRS
Free File to e-file your tax return for free. If you earned $62,000 or less,
you can use brand name tax software. The software does the math and completes
the right forms for you. If you earned more than $62,000, use Free File Fillable
Forms. This option uses electronic versions of IRS paper forms. It is best for
people who are used to doing their own taxes. Free File is available only on IRS.gov/freefile.
10. More Information. For more on
this topic see Publication
4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.
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