, Answering FAQ'sTurboTax Employee
I got a 1099-C form from my mortgage lender. What is it?
You got a Form 1099-C because your lender decided it can not recover what you owe on your mortgage loan and is therefore canceling or forgiving a portion of your debt.
This typically occurs when people lose their homes in foreclosure, abandon them or give them back to their lenders. The part of your mortgage debt that is canceled is generally the difference between what you owed on your mortgage and the home’s value on the open market.
Prior to 2007, many financially strapped taxpayers with forgiven mortgage debt were required to pay federal taxes on it, because the IRS treated it as taxable income.
Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, most borrowers whose mortgage debt on their primary residence is cancelled between Jan. 1, 2007 and the end of 2012 will not have to pay federal taxes on it. This Act was recently extended through the end of 2013.
Important: Not all states follow the new federal law. Therefore, some people could still owe state taxes on canceled debt.
Why was the act passed?
Congress wanted to help homeowners who lost or gave up their homes during the nationwide real estate downturn.
The law also applies to people in danger of losing their homes. Debt forgiven because lenders renegotiated mortgage terms to help homeowners can also be considered non-taxable.
Does all forgiven mortgage debt qualify for the tax break?
No. Here are the requirements:
- The debt must be on your primary residence, not a vacation home or rental property.
- The debt forgiven can be up to $2 million. But for married persons filing separate returns, the limit is $1 million.
- Not all canceled mortgage debt qualifies. The mortgage must have been used to acquire or construct your home, or to improve it. It can also be a mortgage that was refinanced, but only up to the amount of the old mortgage principal, just before the refinancing. If you “cashed out” some of your home equity for purposes other than home improvements, such as buying a car, that portion of your forgiven debt is taxable.
- The debt forgiveness occurred on or after Jan. 1, 2007.
TurboTax will lead you through the steps to enter your Form 1099-C. If you want professional assistance with this form, we can connect you with a professional experienced with this situation using TurboTax CPA Select.
Entering your 1099-C in TurboTax
TurboTax will walk you through this tax break by asking you questions.
The amount of the canceled debt can be found in Box 2 of Form 1099-C. The IRS advises you to contact your lender if you do not agree with the amount shown.
The fair market value should be listed in Box 7.
In the case of a foreclosure, the gross foreclosure bid is considered the fair market value.
If you walked away from the property or gave it back to the lender rather than go through foreclosure, the fair market value is its appraised value.
What if I got a 1099-C a non-mortgage loan?
If you received a Form 1099-C Cancellation of Debt regarding your credit card or car loan, different rules apply. See Reporting Canceled Debt for Credit Cards, Car Loans.
- Form 1099-C, Cancellation of Debt
- Canceled Debt, Is It Taxable or Not?
- Form 1099-A, Acquisition or Abandonment of Secured Property
- Form 982, Reduction of Tax Attributes
- How does bankruptcy effect my taxes?