The economy has hurt a lot of people and many families have been forced our of their homes through the foreclosure process. With all the economic problems already weighing you down, what do you do when your mortgage company sends you a tax form 1099-C showing their loss as your gain? Does that mean you have to pay taxes on that money the mortgage company lost when you already have no money (which is why you lost your home in the first place)?

Not necessarily! There may be help through the Mortgage Forgiveness Debt Relief Act of 2007 (enacted Dec. 20, 2006). According to this act, up to $1,000,000 of forgiven debt on your principle residence may be excluded from your taxes (up to $2,000,000 if filing jointly). This debt forgiveness does not apply to second homes, investment property, business property, credit cards or car loans. Also, the debt on the principle residence must have been used to purchase, build or substantially improve the property (so if the loan was to get cash to pay for a new car, kid’s college, investments, etc., then this debt is not exempt under this act).

For most Americans this is extremely good news! Because of our country’s economic struggles, this debt relief act has been extended through 2012. To take advantage of this legislation you will need to fill out IRS form 982 and submit it with your other tax documents.