In the USA, when a debt amount of US$ 600 or more is repayed, it becomes taxable income for the debtor. The Lendor is typically obliged to file Form 1099-C with the IRS as per the rules set out in the Internal Revenue Code (I.R.C.) 26 U.S.C. Section 6050P. What this means is that in case the debt was waived, the debtor would require to be taxed on the amount of debt waived.  The lending organization is advised to file Form 1099-C in case any one of the 8 points have taken place.

  1. Discharge on investment debt or business debt during bankruptcy
  2. Total surcease of any type of collection of debt
  3. Debt settlement
  4. Expiry of non-requital period
  5. Probate legal proceedings
  6. Selection of Foreclosure solutions
  7. Limitation statute put forth as approbative defense
  8. Unenforceable debt
It is mandatory for the Lender to provide a statement of debt to the debtor before 31st January of the year which follows any one of the eight trigger events.

Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act was signed by President George W. Bush on December 20, 2007. Following is a brief statement of the main provisions of the Act.

Income generated from Waiver of Indebtedness on Principal Residence

This provision has been in force from January 1, 2007, and will be in effect up to December 31, 2009. Under this provision, IRC section 108(a)(1)(E), the waiver of specified principal residence indebtedness is omitted from gross financial earning. Under this provision, the specified principal residence indebtedness is considered as acquisition indebtedness (to buy, build or improve the residence) up to $2 million ($1 million for Married Filing Separately), for purposes of the omission. To qualify, it is mandatory for the house in question should be owned and utilized as a principal place of residence (as per guidelines in section 121).

In case only a part of the loan waived is qualified indebtedness, the omission would only apply to the total amount of debt waived which is over an above the total nonqualified indebtedness.

The above provision does not include the waiver of indebtedness due to services executed for the creditor. Also, the taxpayer in question is required to use the principle residence omission in place of an insolvency

This provision does not apply to discharge of indebtedness on account of services for the lender. Also, an insolvent taxpayer must use the principal residence exclusion instead of the insolvency exclusion, unless the specific taxpayer decides to employ the insolvency exception in place of the exclusion provision. 

Omission of “Sale of Residence Gain” for Surviving Spouses

The above provision is useful for exchanges and sales that have taken place after December 31, 2007. For specific sales within a period of 2 years of a spouse’s demise, the capital gain omission is increased to $500,000 in case the surviving spouse has not yet remarried. This is conditional to  the ownership and use tests being met by both living taxpayers immediately before the date of death  of the spouse that passed away (Section 121(b)(4)).