At the end of 2019 the Mortgage Debt Forgiveness Act was reinstated. Unfortunately, this has not received any media attention. From the bankruptcy cases we handle we know there were a lot of short sales and foreclosures in Southern Maryland the last two years. Therefore, we know it is important to get the word out.
If you are a real estate or tax professional you may have clients this information could help. I only noticed this change because I read a social media post from a local CPA firm!
The Mortgage Debt Forgiveness act was passed back in 2007. Since then it has expired and come back to life several times. Last time it expired was at the end of 2017. Typically when it expired, it was renewed at the end of the next year. Each time it was renewed retroactive to the beginning of the year and extended for the following year. However, when 2018 went by without it being renewed, most people figured it had finally met its demise.
What Does the Act Do?
This act gives people relief from a 1099 resulting from the debt forgiven from the result of a short sale or foreclosure. The problem is that if you owe a debt to someone else, and they cancel or forgive that debt, the canceled amount may count as taxable income. Because of this, if your mortgage company agrees to forgive what you owe after a foreclosure, you can end up with a big tax bill. This is often called Phantom Income. The mortgage debt forgiveness act provides relief from this income tax problem. But only if the forgiven debt resulted from mortgage debt incurred to purchase or improve your principal residence.
Now it is Back. And Gone?
The latest extension goes from December 31, 2017 to December 31, 2019. The law also covers debt forgiven in 2020 resulting from agreements entered into prior to December 31, 2019. However, this seems like it would be a pretty narrow provision. I’ll leave it to the tax professionals to read the IRS regulations that get promulgated to figure out how that provision will apply. You can also read more information on this in the post from Murphy & Murphy CPA, Did You Owe Taxes? You May Be Entitled To A Refund.
If you had to pay taxes on forgiven debt on your 2018 Tax Return make sure you file an amended return. If you have a 1099 for debt forgiven from 2019 you need to show this income is excluded under the act. To do this you probably need to report this on IRS Form 982. This is the same form you would use to exclude forgiven included in a bankruptcy. As of the writing of this post the IRS hasn’t updated this form. If you are expecting to have debt forgiven debt in 2020 consult with a tax advisor now. You want to know if you will be able to exclude that phantom income or not.
Want to know more? Discover what you need to know about short sales and bankruptcy in Maryland. See our post on Short Sales In Maryland, and Click here to see our Free Legal Consumer Guide to Maryland bankruptcy cases and get answers to your questions today. Know your options. Be informed. Protect yourself.
Need a bankruptcy lawyer? Please contact us for a consultation today if you need a Maryland bankruptcy lawyer for your bankruptcy case.
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