Homeowner Tax Relief

photo credit: mhartford

We recently had a short sale on our home. We were surprised to learn we’d be getting a form 1099 for the amount of debt that the bank discharged.  And that we would be required to put the amount of the debt discharged as INCOME on our tax return. Is this true?

Frankie, Hopkins, MN

Yes, the Internal Revenue Code requires debtors to report all the forgiven debts on their Form 1040. Normally this is taxed as ordinary income unless one can use the bankruptcy or insolvency exemption.

However, there’s a rule in place that should help you out this year. Congress passed a law that allows homeowners special relief for the years 2007-2012. In order to qualify, the debt that was forgiven must be from one’s principal residence. Secondly, you must have incurred the debt to buy, build or substantially improve the residence. There’s no relief if you refinanced your mortgage in 2006 and used the equity that was cashed out to buy a Lincoln Navigator.

The rules for determining qualified principal residence indebtedness (QPRI) can be complex if the homeowner obtained a home equity loan and/or refinanced and used the loan proceeds for multiple reasons. So review the specific details with your tax professional.

Joe

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