http://www.bankrate.com/finance/debt...rlest_20100311

Snag a tax break on debt forgiveness
By Steve Bucci • Bankrate.com

Steve Bucciq_v2.gifDear Debt Adviser,
I recently sold my home in New York in a short sale after 14 years. At
the time of the sale, the amount owed on the home was $390,500. We
sold the home for $187,917, which leaves $202,583 to be forgiven. How
much of this amount is taxable?
-- Darren

a_v2.gifDear Darren,
Your question reminds me of the Batman/Riddler stories in which the
Riddler gives clues to nefarious goings-on in the form of a riddle. I
can hear him asking, "If no good act goes unpunished, when is debt
forgiveness taxable?" This may sound like an IRS riddle, but its
answer can cost or save you thousands of dollars. Normally, if a debt
over $600 is forgiven by a creditor, the creditor will notify the IRS.
You will have to treat the forgiven debt as income that's fully
taxable even though you received no cash in the short sale
transaction.

However, because so many people were faced with potentially huge tax
liabilities through debt forgiveness as a result of unsupportable
mortgages, Congress passed an act that exempted a forgiven mortgage
loan from taxation for a limited time and under certain conditions.
Relief is available to you and many others who lost their homes to
foreclosure or a short sale, or who modified their mortgage loans for
less than was originally owed.

Aptly called The Mortgage Debt Relief Act of 2007, this law gives
persons with qualifying debt forgiveness in the years 2007 through
2012 a break on the income tax that would normally be owed on forgiven
debt. Generally, as long as the mortgage loan is for your primary
residence and the amount of debt forgiveness is no more than $2
million ($1 million if married, filing separately for the tax year),
it is a simple matter of filling out an additional form when you file
your taxes.

You already should have received a Form 1099-C from your lender that
lists the amount of debt forgiveness and fair market value of your
home. Using that information, you should fill out IRS Form 982, a
second debt forgiveness document, and send Form 1099-C and Form 982 in
with your tax return for 2009.

For my readers who are currently having trouble meeting their mortgage
payments, I encourage you to contact your lender sooner rather than
later. Banks are not real estate brokers and, for the most part, would
like to avoid the position of owning homes that have gone into
foreclosure. However, banks are dealing with record numbers of
distressed homeowners, so their desire to not own your home may not be
enough to get you a quick resolution. If you get bogged down in red
tape, I suggest you bring in a professional to help. You can find
great free help from HUD-certified counselors at Hope Now, an alliance
between counselors, mortgage loan companies, investors and others to
reach out to homeowners in distress.

Counselors for Hope Now can help homeowners stay in their homes, if
possible, or can come up with the best exit strategy if they need to
terminate their mortgage. The Homeowner's Hope Hotline is (888)
995-4673. For those of my readers who may not want to contact a live
person right off the bat, they can get some valuable free mortgage
help and information at Mortgage Relief Online, a Web site designed to
help consumers determine if they are eligible for mortgage loan
changes.

A word of caution to anyone seeking a mortgage modification. Be
careful! Scams are rampant in loan modifications. Unscrupulous
companies and individuals are taking advantage of consumers who are
worried about losing their homes. Below are some things to watch for
when seeking mortgage help:

* Fees required in advance.
* Guarantees that your foreclosure will be stopped.
* Requests that mortgage payments be made through a company other
than your lender.
* Pressure to sign documents.
* Unsolicited offers of help that ask for personal information
online or over the phone.

Good luck!

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