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Do I owe taxes from my forgiven debt on my modified home loan (reported on a 1099c)?

I got my original home loan in 2001 fro $340,000. In 2005, we refinanced for $420,000. We used the extra money to pay off some debt. This was one of those loans that you had options on what amount to pay, the lowest being less than the amount of interest. Every month the excess interest would go to the principal balance. Last year we found that we were not being able to pay our bills, and were in danger of losing our home. The principal had added up to $460,000. The bank modified and forgave $80,000. Do I owe taxes on this amount (reported on a 1099c)? Or not, due to the Mortgage Forgiveness Debt Relief Act of 2007. The reason I'm asking is that I can't understand some of the language in the act.

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Anonymous

Asked by Anonymous at 4:52 AM on Mar. 13, 2010 in Money & Work

Answers (5)
  • Probably. Call the IRS 1-800-829-1040 - Hours of Operation: Monday – Friday, 7:00 a.m. – 10:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).
    rkoloms

    Answer by rkoloms at 4:58 AM on Mar. 13, 2010

  • That 80,000 is now income.
    motherofhope98

    Answer by motherofhope98 at 8:05 AM on Mar. 13, 2010

  • You got a 1099C. That's income. You need to report it. The amount forgiven sounds like it is for the other debt paid off, not the original principal of the loan. If it had been dropped below the original $340,000, you might have some forgivable debt. The act isn't to cover other bills rolled into a mortgage.

    Consult a tax specialist to be sure though. That's a lot of money to be forking over taxes on right now, so you need to be sure it's right.
    halfpint_ny

    Answer by halfpint_ny at 8:55 AM on Mar. 13, 2010

  • I understand this 1099c represents income, but the house is only worth about $280,000 now, so if the Mortgage Forgiveness Debt Relief Act of 2007 doesn't apply, I might be able to prove insolvency? I will consult a tax specialist, unfortunately, the ones I've talked to over the phone don't seem to know even the basics I have learned on the internet so far...
    mykidsrockmore

    Answer by mykidsrockmore at 9:07 AM on Mar. 13, 2010

  • I doubt the fact that your house is marketable for $280K now has anything to do with it. Your principal was $460K, they forgave $80K, bringing it down to $360K. The lower market value would only come into play when you sell the house and get only $280K for it. Right now, that's just an estimate on paper, and not real.
    halfpint_ny

    Answer by halfpint_ny at 10:34 AM on Mar. 13, 2010

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