My home was foreclosed on. I just got a statement from the bank saying I have to report income because of the foreclosure. What is this?
When a home is foreclosed on, the lender is able to sell the property and pay off the loan. Sometimes the value of the home is less than the money owed. This means that some of the loan was not paid off. Often times the lender agrees to not collect the rest of the money you owe. The IRS may consider the amount of debt “forgiven” as income and tax it. The lender will send you a 1099-C form. This form says how much the bank thinks is reportable income.
Do I have to pay taxes on the amount of debt forgiven?
Homeowners whose mortgage debt was partly or entirely forgiven in 2007 through 2026 may be able to claim special tax relief by filling out Form 982 and attaching it to their federal income tax return.
Normally, debt forgiveness results in taxable income. A law passed on December 20, 2007 and extended through 2026 may allow taxpayers to not count debt forgiven on their main home as income. In order to claim this benefit for the current year, the maximum amount you can claim as principal residence indebtedness is $750,000. For a taxpayer using the married filing separate status, the limit is $375,000. The law applies to mortgage debt forgiven in 2007 through 2026.
What do I have to show to exclude the debt forgiven from my taxable income?
You have to show that the mortgage you took out was to buy, build or substantially improve your main home. This can include debt that was used to refinance a mortgage on your main home.
What if I used a part of my home equity loan to pay off my car or credit card?
The part of the loan used for expenses like credit card debt does not qualify for the exception. However, another exception may apply. Talk to your tax advisor for details and to find out if the exception may apply to you.
What if the home equity loan was for things like credit cards?
Taxpayers who used the loan to pay off items like credit cards still might not owe taxes. A taxpayer who was insolvent just before the debt was forgiven, may not have to claim the entire amount of debt forgiven as income. Insolvent means the amount of debt you owe is great than the fair market value of your assets.
Example: Joe had mortgage debt forgiven in 2023. On the day before the mortgage was forgiven, his assets and debts looked like this:
| ITEM | FAIR MARKET VALUE OF ASSETS | AMOUNTS OWED TO LENDERS |
| Car | $ 1,000 | $ 1,200 |
| House | $50,000 | $60,000 |
| Credit Card | $ 0 | $ 2,300 |
| Total | $51,000 | $63,400 |
Joe is insolvent by $12,400. This means he owes $12,400 more than he owns in assets. The mortgage lender forgave $10,000 of mortgage debt. Because his debts exceeds his assets by more than $10,000 none of the forgiven debt is taxable. If his debt only exceeded his assets by $9,000, then he would potentially owe taxes on only $1,000 of the mortgage debt forgiven.
You will have to file a tax return with a form 982 for the year in question.
I didn’t get a notice from the lender but I just got one from the IRS. Now what?
Sometimes people who lose their house do not get a 1099-C. This is because the bank sends it to your old address. The first time you hear about this form could be from the IRS. If you get a notice from the IRS, don’t panic. You may be able to get assistance with this type of problem from Iowa Legal Aid’s Low-Income Taxpayer Clinic. To apply for help, call Iowa Legal Aid toll-free at 1-800-532-1275.