My home was foreclosed on. I just got a statement from the bank saying I have to report income because of the foreclosure. What is this?
When a home is foreclosed on, the lender is able to sell the property and pay off the loan. Sometimes the value of the home is less than the money owed. This means that some of the loan was not paid off. Often times the lender agrees to not collect the rest of the money you owe. The IRS may consider the amount of debt "forgiven" as income and tax it. The lender will send you a 1099-C form. This form says how much the bank thinks is reportable income.
Do I have to pay taxes on the amount of debt forgiven?
Homeowners whose mortgage debt was partly or entirely forgiven in 2007 through 2013 may be able to claim special tax relief by filling out Form 982 and attaching it to their federal income tax return.
Normally, debt forgiveness results in taxable income. A law
passed on December 20, 2007 may allow taxpayers to not count debt forgiven on their main home as income. In order to claim this benefit, the balance of the loan had to be less than $2 million. For a taxpayer using the married filing separate status, the limit is $1 million. The law applies to mortgage debt forgiven in 2007 through 2013.
What do I have to show to exclude the debt forgiven from my taxable income?
You have to show that the mortgage you took out was to buy, build or substantially improve your main home. This can include debt that was used to refinance a mortgage on your main home.
What if I used a part of my home equity loan to pay off my car or credit card?
What if the foreclosure happened before 2007 or the home equity loan was for things like credit cards?
Example: Joe had mortgage debt forgiven in 2006. On the day before the mortgage was forgiven, his assets and debts looked like this: