On a day when Treasury Secretary Henry Paulson and six major banks announced a 30-day moratorium on foreclosures on some types of property, the Internal Revenue Service said homeowners whose mortgage debts were partially or entirely forgiven could claim relief on a newly revised IRS form.

Debt forgiveness normally results in taxable income, but under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return.

The late-December enactment means that reporting procedures for this law change were not incorporated into early versions of tax-preparation software or IRS forms. People using tax software will need to download updates from their provider that include the revised Form 982.

The IRS is now updating its systems and expects to begin accepting electronically filed returns that include Form 982 by March 3. The paper Form 982 is now being accepted, but the IRS is encouraging taxpayers to file electronically. The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for relief. In most cases, eligible homeowners fill out a few lines on Form 982 (specifically, Lines 1e, 2 and 10b).

The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available.

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