Are taxes levied on mortgage debt forgiveness?
Millions of people in the US have default on their mortgage payment after the recent economic depression. In such a situation, they are usually bound to enroll in debt relief programs to make the owed amount affordable to pay off. The debt relief companies negotiate with the creditors to lower the interest on the principal balance in order to make it affordable to pay off. Therefore, they pay less than they originally owed to the creditors. Generally, the creditors forgive a portion of the debt you owe. But the Internal Revenue Services consider the forgiven amount as taxable income. And the rules are not simple if you have incurred mortgage loan debt. Remember that the tax implications are based on one of the main factors whether you are responsible for paying the debt after foreclosure.
- When your lender decides to forgive a portion of your debt you owe, the IRS treats the forgiven amount as taxable income. But remember that the forgiven amount will be treated as taxable income if you are personally liable for the debt and fail to qualify for exceptions. Therefore, the mortgage debt can increase your taxable income once your mortgage lenders assuage some part of your debt. The IRS approach is comparatively different for mortgages on residential real estate from other types of debt so you are not required to pay taxes on that forgiven debt.
- If your mortgage has qualified for a principal residence then the IRS will not treat the forgiven mortgage debt as taxable income. Your house can be used as security against the loan amount in the event you cease repaying the loan. This exception is applied only to cover your main house but if you own some other home then this exclusion does not apply to those.
- In case you are not required to pay the owed amount according to the mortgage term after foreclosure, then it is a non recourse loan. You are not liable to pay income tax on forgiven debt on this type of loan. But you are required for paying capital gains on the outstanding mortgage before the foreclosure exceeds your tax basis on the house.
Therefore, these three points can help you understand whether taxes are levied on mortgage debt forgiveness, on the basis of which you can take necessary measures so as to avoid the taxes levied on mortgage debt forgiveness.