1099 Mortgage Debt Foregiveness Rule Update

I have been getting questions everyday about the IRS' rules when it comes to the mortgage debt foregiveness act. I am not an attorney or a CPA, so talk about your situation with a professional in those areas.

In the case of foreclosure, short sale or even just walking away, it is a safe bet that you will get a 1099.

I have done a lot of recent research for people becuase the law seems very unclear about which circumstances it applies to. Here is what I have been able to figure out.

It appeared that for many homeowners, the only way to relieve yourself of the tax from forgiven mortgage debt would be to meet insolvency requirements. In a foreclosure situation, you may already meet them. The financial picture usually isn't looking so hot!

With the insolvency, assigning your assets with values and the extra paperwork can be tricky.

But according to BankRate.com, there is another out. The Home Sale exclusion provision applies here. For more info click here to go to their article. Basically, anytime you sell a primary residence (lived in by you for 2 of the last 5 years) you can exclude gains up to $500,000 for married people filing jointly (less if you are single) from the sale. The theroy behind this is that the mortgage forgiveness is really a "phantom gain." Much easier to figure out!

I did ask my friend, Judi Fluger who is both a mortgage consultant with Wells Fargo and a tax attorney, and she confirms that this is correct. Again, with any tax questions about your specific situation please contact your own accountant or attorney. This is not intended as advice.