Significance

• The Mortgage Forgiveness Debt Relief Act of 2007 allows tax-free treatment of a debt discharge as a result of debt forgiveness from foreclosure, mortgage modification or restructuring. The tax benefits only apply to debt forgiven between 2007 and 2012. The cap on the amount forgiven is $2 million for spouses filing jointly and $1 million for individual filers.
  
  

Identification

• Debt is also not taxable income if it was discharged through a bankruptcy proceeding, the taxpayer is insolvent or the debt was related to farm income.
  
  

Considerations

• The income is the amount forgiven. The IRS defines true debt as a legal obligation to repay an outstanding loan. Under the tax code, not all debt is considered a legally enforceable obligation of repayment. The true test is whether the lender can force repayment through a legal injunctive relief. The IRS may look at whether a relative loaned you the funds, and in these cases, the IRS may treat the discharge as a gift.