Mortgage Loan Modification Tax Relief

If you have had a mortgage loan modification and you receive a form 1099-C (cancellation of debt) there may be some tax relief. Publication 4681 Canceled Debts, Foreclosures, Repossessions and Abandonments goes into detail about cancelled debt and defines exclusions and deductions. I am only going to discuss how this affects your primary residence.

A mortgage loan modification occurs when you and the bank agree to a reduction of the principle balance. You may receive a form 1099-C showing cancelled debt; this amount is to be included in income. However if it qualified debt (the mortgage was used to buy, build, or to substantially improve your main home) then the amount on the 1099-C line 2 or a portion of it may be entered on form 982 to be excluded from income. If you have refinanced your primary home and received money then your qualified debt may be limited to your original mortgage depending on what the money was spent on. Also the amount of debt that was not used to improve the primary residence may have to be deducted from the 1099-C amount, thus reducing what you can deduct from income. The amount entered on form 982 to be excluded from income will also be used to reduce your basis in your home.

If all of this seems complicated it is, especially if you have refinanced your home more than once.

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