New Law May Help Reduce Tax Burden From Forgiven Mortgage Debt
Just when you thought your debt issue was behind you, you open your mail and find a letter from your former creditor stating that they reported the forgiven income to the IRS and now you must do the same. While this seems extremely unfair, there are tax consequences for forgiven debt. The amount forgiven is counted as income.
Fortunately, Congress revived a law that might be able to save you money, particularly if that forgiven debt was related to a mortgage. The Further Consolidated Appropriations Act of 2020 became law on December 20, 2019. One of the greatest benefits of this Act is that it is retroactive. In other words, you can receive the benefits of the Act if your debt was forgiven at any time since January 1, 2018. The Act in its current form extends until January 1, 2021.
The specific portion of the Act that might help you with your tax issue is known as the Qualified Principal Residence Indebtedness Exclusion, or QPRI for short. When you receive forgiveness on a debt, such as when you receive a reduction in principal balance on a mortgage based on a loan modification or a deed-in-lieu of foreclosure, the government counts the amount of debt forgiven as income that you must then claim on your tax return. Under the QPRI, if the debt forgiven was in relation to the mortgage on your primary residence, you may not have to include the forgiven amount as income. You should ALWAYS talk to an experienced accountant or a tax attorney to see if this law applies to you.
How will you know if your creditor forgave part of your debt? You will likely receive a Form 1099 from your creditor. There are several different versions of this form. Typically, debt forgiven in relation to a mortgage comes on a Form 1099-A. Sometimes, this notice will be on a Form 1099-C. Your former creditor has also sent a copy of this form to the IRS, and the IRS will be looking for your tax return to see how you deal with this income. It is extremely important to speak with a professional to make sure you are using the law appropriately.
Sometimes the information on these forms is incorrect. While you can address these inaccuracies by contacting the lender directly, you should always contact an attorney to make sure that you dispute the information correctly.
If this Act does not apply to you, you still may have a few options. You can try to work with the IRS to get a payment plan that may last for up to 5 years. If that is not a viable option, you may want to speak with an attorney to consider your options in bankruptcy.