Georgia residents who have had all or part of their debt canceled by a lender normally have to report the amount as taxable income. However, for mortgage debt that has been canceled, homeowners may be able to take advantage of a tax exclusion.
If the canceled debt was a mortgage for a main home, in some circumstances, a person can exclude that amount from his or her income. The loan must have been used to build, buy or significantly improve the person’s primary property, which should have also secured the mortgage.
Individuals who have had portions of their mortgages canceled through loan modifications can also sometimes exclude those amounts from their incomes. People who have had debts discharged due to participation in the Home Affordable Modification Program or in foreclosures also may be eligible for the exemption.
Debts that were canceled because of a refinanced mortgage may be excluded from income only if the funds were used to drastically improve a person’s main home. The amount to be excluded cannot exceed the amount of the old mortgage principal right before financing.
Debts that have been waived on credit cards; auto loans; and mortgages for second homes, rental and commercial properties still need to be declared as income. However, individuals may want to consult with attorneys that practice tax law since there may be other rules that can be used to indicate that the canceled debt is nontaxable.
People with issues relating to their income taxes should consult with tax law attorneys. They may review their clients’ tax situations and advise them of the appropriate legal options. A lawyer may also communicate with the IRS on behalf of a client regarding income tax returns, tax refunds and more.