If your lender cancels or forgives a certain amount, it is usually taxable and mortgage debt is not an exception. Mortgage debt relief is usually considered as income. This is because amount borrowed from a lender and not paying it back is considered as income from that specific transaction. However, as per the Mortgage Debt Relief Act of 2007, the taxpayers can exclude the income generated from discharge of mortgage debt on their primary residence.

Mortgage Debt Relief Act – What is it?

The Mortgage Forgiveness Debt Relief Act was introduced in order to help homeowners as previously they used to lose the property as well as pay taxes on the forgiven debt amount. This is because the creditor had to report the cancelled debt amount on the IRS (Internal Revenue Service) on Form 1099-C. As per the Mortgage Debt Relief Act, the taxpayers are allowed to exclude reporting the cancelled debt amount.

The taxpayers can exclude maximum of 2 million USD of the forgiven amount. However, married taxpayers filing separately can exclude 1 million USD each if they are filing separately. The lender has to send you Form 1099-C where the forgiven/cancelled amount in mentioned in box 2. So, by looking at the form, you can come to know how much amount is forgiven or cancelled. This act is effective on the forgiven debt amount (on qualified principal residence) from the year 2007 to 2012.

Mortgage Debt Relief Act – Does it apply everywhere?

The mortgage debt relief doesn’t apply everywhere. The Mortgage Debt Relief Act of 2007 only applies to cancelled or forgiven debt used to purchase, build or improve your principal residence. The act also applies to the refinance debt incurred for the similar purposes. Moreover, the debt has to be secured by the home.

Mortgage Debt Relief Act – Is it different in California?

The Mortgage Debt Relief Act in California is not similar with the federal act. If you stay in California, then the qualified principal residence indebtedness is 800,000 USD if you’re single or married filing jointly and 400,000 USD if you’re married but filing separately. This is applicable for taxable years from 2009 to 2012. The act also limits the debt relief amount to 500,000 USD for taxpayers who’re married and filing jointly and 250,000 USD for taxpayers who’re married but filing separately.

While acquiring knowledge on Mortgage Debt Relief Act, you should know that the cancellation of debt is not taxable in case of a non-recourse loan. When you default on such a loan, the lender can only repossess the property that is secured as the collateral. He/she cannot pursue anything other than the collateral. However, there may be other tax consequences in case of a non-recourse loan.