1099C Forgiveness of Debt Tax LiabilityIt’s that time of the year, when you begin to think about income tax preparation, and the 1099’s begin to arrive in the mail. A 1099C from the lender for debt forgiveness on a mortgage can be a real shock due to its dollar amount. Remember it includes the balance you owed when you stopped making payments, past due interest, past due taxes, past due homeowners insurance, late fees, legal fees and other foreclosure expenses attributed to your loan. It gets big quick.

But all is not lost. If this is your primary residence and you are filing jointly with your spouse, you will have $2,000,000 of tax exclusion under the Mortgage Forgiveness Debt Relief Act which expires at the end of 2012. I am not certified tax preparer, so you should check with one before making any assumptions.

If the property in question is a 2 home or investment property it can get a little dicey. Rental properties and 2nd homes are not covered by the Mortgage Forgiveness Debt Relief Act but that doesn’t mean you’re not covered.

Insolvency (when your liabilities are more than your assets) is a potential tax exemption. Your passive losses may also exceed that of the forgiven amount. Your best bet is to meet with your CPA or Enrolled Agent to go over your specific situation before making a decision without doing the research first.

You can review the IRS Booklet about your options for exclusion of 1099C income from your tax liability. I have also included the IRS Insolvency work sheet to help you determine what your liability might be.

Relax and good luck.