Regardless of the circumstances of your foreclosure, you could receive a 1099 from the IRS.

Here are 10 facts the IRS wants you to know about mortgage debt forgiveness.

Typically, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Act of 2007, you can exclude up to $ 2 million of forgiven debt on your primary residence.

The limit is $ 1 million for a married person filing a separate return.

You can exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in foreclosure.

Debt qualifies if it is to purchase, build, or substantially improve your primary residence and is secured by that residence.

Proceeds from refinanced debt used to substantially improve your primary residence also qualify for the exclusion.

The proceeds of refinanced debt that are used for other purposes, such as paying off credit card debt, cannot qualify for exclusion.

If you qualify, claim the special exclusion by completing Form 982, Reduction of Tax Attributes Due to Debt Forgiveness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

Debts forgiven on second homes, rental properties, commercial properties, credit cards, or auto loans do not qualify for the tax relief provision. In some cases, other tax relief provisions apply, such as insolvency. IRS Form 2 provides more details on these provisions.

If your debt is reduced or eliminated, you will normally receive a year-end statement, Form 1099-C, Debt Cancellation, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any foreclosed property.

Examine Form 1099-C carefully. Notify the lender immediately if the information displayed is incorrect. You should pay particular attention to the amount of debt forgiven in Table 2, as well as the value shown for your home in Table 7. For more information on the Mortgage Debt Forgiveness Act of 2007, visit http: // www.irs.gov. A good resource is IRS Publication 4681, Discharged Debts, Foreclosures, Recovery and Abandonment, IRS Codes and Regulations.

How does the Mortgage Forgiveness Act work? Under federal law, a financial institution is required to file a Form 1099-C every time it forgives or cancels a loan balance greater than $ 600. This can create a tax liability for the debtor because the canceled debt is considered income to tax effects.

This debt relief includes complete debt cancellation. If the terms of the mortgage were renegotiated, up to $ 2 million of forgiven debt is eligible for this exclusion ($ 1 million if married filing separate return). The amount of debt forgiven must be reported on Form 982 and attached to the taxpayer’s tax return.

Be sure to report the canceled / forgiven amount on Form 982 and include that form with your income tax return. It is recommended to obtain the services of a competent tax professional.

A great site for more information on IRS codes is the American Taxpayers Association website; membership is free.