Minnesota residents may be aware that canceled debt is generally considered as income that must be reported to the IRS. However, there are some exceptions to that rule. For instance, some homeowners who had their mortgage debt canceled in 2015 and 2016 may not have to count it as income. This exemption may apply to those who took out loans to buy, build or improve their main homes in a substantial manner.
Individuals who had their debt forgiven when refinancing their current mortgages may also be able to waive having to declare it as income. The loan must be secured for the main home, so this exclusion does not apply to second homes or rental properties. The exception may also apply to those who had some of their home loan debt forgiven as part of a loan modification.
Participants in the Home Affordable Modification Program as well as homeowners who had portions of their mortgage debt forgiven in foreclosures may also be able to forgo reporting it as income. Homeowners who had more than $600 in canceled debt should receive Form 1099-C from their creditors. Excluded debt will be recorded on Form 982, which should be included on a homeowner's federal tax return. A tool offered on IRS.gov can help taxpayers determine if they qualify for an exclusion.
Individuals who have had debt forgiven in the past year may need to pay taxes on it. Failure to include this information on a tax return could result in financial penalties such as late fees or interest on the unpaid amount. A lawyer may be able to assist someone to work with the IRS to either negotiate a payment plan or defend against charges of unpaid taxes. If so desired by his or her client, an attorney may negotiate alone with the IRS.