The Mortgage Forgiveness Debt Relief Act and Debt Cancellation-IRS

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

Click here for the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

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Searchable database of ethics opinions from the New York State Bar Association Committee on Professional Ethics. Available for search by keyword, category or opinion number. Search more than 850 opinions on topics including various conflicts of interest, attorney advertising, standards for social media and social networking and more. Opinions are keyed to the New York Rules of Model Conduct and are available for sharing via social networks or email. Ethics opinions are available to all and are of particular interest to attorneys in New York State.

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