Can the IRS Potentially Consider Your Florida Debt Forgiveness Income?

Has your Florida debt been forgiven? Don't be surprised if the IRS considers this income!

Historically, any discharge of indebtedness or other relief from debt is taxable as income under the Internal Revenue Code (IRC). In general under the IRC, when a lender decides to forgive all or a portion of a borrower's debt and accept less than the original amount owed, the forgiven amount is considered as income for the borrower and may be taxed.

However, the Mortgage Debt Forgiveness Relief Act of 2007 was enacted to provide relief to qualifying homeowners who would have otherwise suffered a tax consequence because of the forgiveness of mortgage debt. The Mortgage Debt Forgiveness Act has paved the way for many additional amendments to help taxpayers exclude qualifying debt that has been forgiven from income and eliminate potential tax liabilities. Recently the Emergency Economic Stabilization Act of 2008 has extended the tax relief until 2012.

This benefit is only available to qualifying taxpayers. Discharged acquisition indebtedness is only excludable if it is incurred with respect to the taxpayer's principal residence (Code Sec. 108(h)(2), as added by P.L. 110-142). The term "principal residence" as it applies here has the same meaning as used in determining whether the exclusion under Code Sec. 121 applies to the gain from the sale of the residence (Code Sec. 108(h)(5), as added by P.L. 110-142). Under regulations issued pursuant to Code Sec. 121, whether a residence is the taxpayer's principal residence depends on an examination of the facts and circumstances, such as the taxpayer's place of employment and mailing address (Reg. §1.121-1).