The Act. of Mortgage Forgiveness Debt Relief is likely to exclude mortgage debt under a new tax law. Several types of mortgages can be excluded from tax under this law. This law is very important for those who have lost or sold their homes or restricted their mortgage.
In the Tax Code, there are two types of mortgage debt. 1. The acquisition debt. 2. Equity debt. There are some differences that could be excluded. The proceeds from the purchase of debt used in the construction, purchase or substantially improve a principal residence.
Act. of Mortgage Forgiveness Debt Relief may exclude the acquisition debt, but mortgage debt can not be excluded under this law. Rather, there is some chance that the house of debt may qualify for the exclusion of bankruptcy or insolvency.
Well there is a criterion of other debtors. The debtor must have used your home as a main home. This means that if any body has a home, second home, a rental home or investment property, this exclusion shall not be qualified. But if all the assets of the cancelled debt is there, then it might be competent under the bankruptcy exclusion.
Now the question is how much debt can be tax free. Up to an amount of $ 20,00,000 of debt can be excluded from the income of the years between 2007 and 2012.
So on a practical level, it means that a taxpayer must show how his loan proceeds will be used. And this is to separate the acquisition and equity debt of others.