Thursday, May 22, 2008

Debt Forgiveness

This year the IRS has issued a debt forgiveness credit for those who have forclosed on their property Debt Forgiveness is emerging more and more in the year 2007. Did you know that 1 in 196 homes will be forclosed in 2007, and 1.4 million .projected in 2008.

What is Debt Forgiveness
Lender cancels or forgives your debt, in the event you can't pay your mortgage. Consequently the creditor does not pursue collections. They write-off your balance due , however this effect your credit rating and the creditor can repossess and sell the asset in the event this happens.

Filing a 1099-C will be needed for cancellation of debt. However 1099-A can deal with debt forgiveness also. Abandonment of debt is filed as an acquisition or adandonment of secured property. Form 1099-A is filed if borrower receives property in exchange for releasing the debt (a deal to give up property in lieu of forclosure). Secondly, Form A will apply to those acquiring abandonment property from the borrower that the borrower has a loan outstanding ababdonment in lieu of forclosure.

Form 1099 A can trigger a taxable event . For Example:

If a house abandonment and they purchased a house for $180,000 and the secured debt on the house $200,000, one can personally liable for this debt.The Fair Market Value of house on abandonment is $180,000 . The purchase price is > the secured debt on house . therefore the IRS has a gain on abandonment for $20,000.

If cancellation of debt is not reported properly, the IRS will assume all forgiven debt is income and therefore taxable
There are tax professionals that can help you understand these tax laws

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