Read about the "Mortgage Forgiveness Debt Relieft Act and Debt Cancellation"
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.
However, 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.
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 and at
http://www.irs.gov/individuals/article/0,,id=179414,00.html
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