When an individual owes a debt and is subsequently unable to repay the debt, the creditor has the option of forgiving the loan or other unsecured debt. Credit card companies will use this method to settle debts with consumers in an effort to avoid gaining nothing if they are forced into bankruptcy. This works out well for the debtor, except that the amount that is forgiven is generally reportable as income and a Form 1099-C is issued by the creditor. When a home is sold through short sale, the forgiven amount would be the difference between the loan balance and short sale accepted offer.

Typically, the amount of the forgiven debt that is listed on a Form 1099-C must be reported as taxable income on your return. This is not always the case, however. A creditor can agree to consider the debt as paid in full and you may not need to report the difference as income. When a mortgage is forgiven, the difference between the value and payoff amount can be quite large, which leaves homeowners in a bit of a bind. However, the passage of the Mortgage Debt Relief Act of 2007 is helping those left confused and financially burdened in the wake of the recent increase in foreclosures and short sales.

Passed in response to the large number of homes going through the foreclosure process, the Mortgage Debt Relief Act of 2007 generally excludes homeowners from having to claim the forgiven debt on their personal income taxes. This is also true of amounts realized due to loan restructuring. There are some basic requirements, however. Mainly, the home must be the primary residence of the mortgage holder, or the home that the loan holder currently lives in. This debt relief is not available to foreclosures or short sales of vacation or investment homes and the old tax rules will apply in such instances.

Even if you qualify for the exception, you must still report the forgiven debt on your taxes. It will not be included as income, but the IRS must be made aware that you are eligible for exclusion. This is done by filing IRS Form 982 along with your taxes. The entire form does not need to be filled out, however, so read the form carefully. In addition, the Mortgage Debt Relief Act of 2007 applies only to debt forgiven from 2007 through 2012 and there are dollar limits to the exclusion. For this reason, it is advisable that you contact Vivix Credit Solutions for help if you believe you have a qualified principal residence.