Under normal circumstances, debt forgiveness is counted as taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, military service members may qualify to exclude a large amount of debt forgiveness on your home.
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Mortgage Forgiveness Debt Relief Act for Military

If you are having difficulty making your mortgage payments, the military has ways to help you avoid foreclosure and maintain your credit score.

First, contact your on-base Family Support Center to get financial counseling that will put you back in control of your debt. Next, if you have a sub-prime mortgage, The Veterans' Benefits Improvement Act can help you refinance into a safer, more affordable VA loan, with loan counselors at the Department of Veterans Affairs (VA) standing by to help you avoid foreclosure.

And there is even more good news for military service members with overwhelming mortgage debt: if any percentage of your mortgage debt is forgiven during tax years 2007 - 2012, you may be able to exclude the forgiven debt from your taxable income when filing your taxes.


Under normal circumstances, debt forgiveness is counted as taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, military service members may qualify to exclude up to $2 million of debt forgiveness on your home (principal residence), or $1 million for married service members filing a separate return.

As a military service member, you may exclude debt reduced through mortgage restructuring, in addition to mortgage debt forgiven in a foreclosure. This means that service members already having trouble with debt are eligible for a special tax relief, giving you a head start on restarting your finances.


To qualify, the debt or refinanced debt in question must have been spent on buying, building, or improving a major part of your principal residence or home. The debt in question must also be secured by that same residence.

However, earnings from refinanced debt are only eligible for exclusion if they are used on your home, and not, for example, to pay off credit card debt. Debt forgiven on second homes, rental property, business property, credit cards or car loans usually do not qualify for the tax relief under the Mortgage Forgiveness Debt Relief Act.


If your debt meets the qualifications, claim the special exclusion by filing Form 982, also known as Reduction of Tax Attributes Due to Discharge of Indebtedness, during tax season. Attach the completed form 982 to your federal income tax return for the tax year when the qualified debt was forgiven.

If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender - but be sure to look at the form carefully for incorrect information, especially the amount of debt forgiven and listed value of your home. Notify your lender to make the appropriate changes.


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