President Bush signed the Mortgage Forgiveness Debt Relief Act on December 20, 2007. The purpose of the bill is to help homeowners who are caught in the housing crisis. The act applies to your Primary residence only. Say, when the bank accepts a short sale or sells your property for a loss and sends you a 1099, you are supposed to claim this income as your tax returns. When claiming this as income, the act allows the debt to be forgiven-meaning you don’t owe taxes on it.
The following information was found on IRS website www.irs.gov.
If your mortgage debt has been partly or entirely forgiven, you may be able to exclude the forgiven debt from your income.
Normally, the amount of debt forgiven by the lender must be reported on your tax return as income. But because of a special tax relief program, generally, you will not have to report as income mortgage debt on your property that was forgiven or reduced by the lender.
This includes mortgage debt that was forgiven in foreclosure and debt reduced through a mortgage workout, short sale, or foreclosure. This relief is only available on mortgage debt used to buy, build or improve your home. And it is only available for debt that was forgiven in the years 2007 through 2012.
There is also a dollar limit on how much forgiven debt does not have to be reported.
Visit www.irs.gov and see the instructions for Form 982 for more information, including information on restrictions that apply. If you do qualify, just fill out Form 982 and attach it to your tax return.
A word of caution: This relief applies only to mortgage debt. Other kinds of debt are not eligible for this relief, and special rules and limitations apply.
So before you claim it, check out the details at www.IRS.gov or consult a competent legal professional or tax adviser for advice specific to your situation.