Do I Claim My Mortgage if I Lost My Home?

This week we hear from Beth in Reisterstown:

Dear Alice,

We lost our home last year and this year I received a form 1099-A with the amount of the mortgage on it.  Do I have to claim that on my return?

Beth

Reisterstown

Dear Beth,

I’m so sorry to hear about your bad luck, but I’ve got some good news for you. Although you have to report the foreclosure on your tax return, you will not be taxed on any income from the debt forgiveness on your mortgage. 

Typically, if you have a debt that is forgiven like a credit card where you only had to pay a portion of your debt and the credit card company writes off the rest, the amount of the debt that is forgiven is taxable as income to you.

So, if you were one of those poor souls who found themselves owing more on their home than the house was worth and the home was foreclosed on, under ordinary circumstances, the difference would be taxable to you. But Congress set out to assist folks who were upside down in their homes and passed legislation that excluded foreclosure debt forgiveness from being taxed.

There are some specific guidelines you need to follow to qualify for the exclusion.  The home must be your primary residence, and the same rules that apply to deductibility of mortgage interest apply to this exclusion.  The debt must be money borrowed to buy or improve the home plus up to $100,000 in home equity debt with a maximum exclusion of $2,000,000.  The forms are a little tricky to complete, but well worth it if you find yourself in this situation.   The exclusion is a temporary reg that only applies to debt discharges that happened after January 1, 2007, and before January 1, 2013.  I hope this helps and good luck!

Alice A. Reid, EA

Disclosure:  The nature of taxation is complex and information used to complete your personal tax return is dynamic – meaning that one area of your tax return can affect others, while our goal is to provide you with good general information, IRS may require certain documentation or substantiation to support any tax position you take on your tax return.  If your issue is complex we recommend you talk to a tax professional who can better understand your entire tax situation and advise you appropriately.