Home Foreclosures, short sale, Debt Relief Forgiveness
Often a foreclosure or a short sale may lead to tax problems that the owner may have not bargained for. This happens whe a bank issues a 1099-C for cancelation of debt upon a foreclosure or even a short sale. Now the IRS wants their share of that 'phantom income' the bank treated as a loss or debt foregiveness.
In Dec. of 2007, Congress provided relief to foreclosure victims through the Mortgage Foregiveness Debt Relief Act. The IRS says that in general up to $2Million in debt foregiveness is excluded from income when this debt is associated with 'phantom income' generated with the foreclosure of your primarey home.
The debt to be excempt must be acquisition debt used to purchase your home or substancially imporve it and disqualifies it if the debt was from a reifance of property after purchase.
Furthermore, this law is temporary as to get the benefit of the provision property must have been dispossed of and debt cancelled on or after Jan 1, 2007 and before January 2010.
If your property is not the principal residence, such as an investment property, there exists other types of relief you may qualify for. Consult your tax man or attorney for furhter information.
(This article is informative only and should not be interpreted as being tax or legal advise. We stoongly recommend you consult your CPA or a lawyer)
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