If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.

The IRS reminds all taxpayers that the fair market value of property or services received through a barter is taxable income. Both parties must report as income the value of the goods and services received in the exchange.

Here are 10 key facts from the IRS about mortgage debt forgiveness:

  1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.
  2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.
  3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.
  4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.
  5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.
  6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify.
  7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.
  8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.
  9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.
  10. Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.

Use the Interactive Tax Assistant tool on IRS.gov to check if your cancelled debt is taxable. Also, see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. IRS forms and publications are available online at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

All e-fileable forms, including Form 982, are free with TaxACT. The program will guide you step by step through mortgage debt forgiveness and offers free help every step of the way. Start your TaxACT return now.

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Upcoming Tax Dates

May 2 — Social security, Medicare, and withheld income tax
File Form 941 for the first quarter of 2016. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter timely, properly, and in full, you have until May 10 to file the return.

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Deposit the tax owed through March if more than $500.

May 2 — Form 720 taxes
File Form 720 for the first quarter of 2016.

May 2 — Wagering tax
File Form 730 and pay the tax on wagers accepted during March.

May 2 — Heavy highway vehicle use tax
File Form 2290 and pay the tax for vehicles first used in March.

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May 10 — Social security, Medicare, and withheld income tax
File Form 941 for the first quarter of 2016. This due date applies only if you deposited the tax for the quarter timely, properly, and in full.

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If the monthly deposit rule applies, deposit the tax for payments in April.

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May 27 — Regular method taxes
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May 31 — Wagering tax
File Form 730 and pay the tax on wagers accepted during April.

may 31 — Heavy highway vehicle use tax
File Form 2290 and pay the tax for vehicles first used in April.

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