Note: Here are a few quick points that you should know about the Mortgage Forgiveness Debt Relief Act. See how this applies to you below…

Americans struggling with substantial mortgage debt that exceeds the value of their home have several options, including a short sale, foreclosure, or mortgage restructuring. Traditionally, any of these options that results in forgiving or discharging some of the debt on their primary home results in a form 1099-C, Cancellation of Debt, from the lender.

The IRS considers most forms of cancelled debts, including mortgage debt, as income for the recipient. This can mean a tax bill of thousands of dollars, even if you lost the home in foreclosure.

The Mortgage Forgiveness Debt Relief Act of 2007 was passed at the height of the foreclosure crisis, gives homeowners tax relief from this forgiven debt. Here’s what you need to know about the Mortgage Forgiveness Debt Act.

1. Mortgage Forgiveness Debt Act Extended Through 2017

The Mortgage Debt Forgiveness Act was set to expire at the end of 2015, which would have meant any mortgage forgiveness through a short sale would have counted as income for homeowners. The extension means you can still qualify for tax relief if you gave up your home in a short sale, foreclosure, or deed in lieu or had a loan modification in 2016.

2. The Debt Must Have Been For Your Primary Residence

The Mortgage Debt Relief Act excludes as income debt discharge on a primary home only, not a vacation or investment home. The Act includes mortgage restructuring and full foreclosure as well as refinancing, but only up to the amount of the principal balance of the original home loan.

To qualify for mortgage forgiveness debt relief, the debt must have been used to build, buy, or substantially improve your primary home. If the debt is refinanced, the proceeds must have been used to improve your home. Refinanced debt that was used for another purpose, such as buying a car or paying off credit card debt, does not qualify.

3. The Exclusion is Limited to $2 Million

The Mortgage Forgiveness Debt Act limits the exclusion to $2 million, or $1 million for married couples filing separately.

4. Taxes on the Average Short Sale Are $22,000

According to RealtyTrac, the average short sale has $75,000 in mortgage debt forgiven with a potential tax of $22,114 on average. This means the average homeowner who uses the program for tax relief saves more than $22,000 after a short sale.

5. You Will Still Receive a Form 1099-C

You will be issued a Form 1099-C, Cancellation of Debt, if you have debt forgiven. This form is required by law to show the amount of debt forgiven and the fair market value of any property that was foreclosed. This does not mean you do not qualify for mortgage forgiveness debt relief. When you prepare your Form 1040, you will need to submit Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to report the amount of debt that should be excluded from your income.

You May Qualify for Other Tax Relief Provisions

If you do not qualify for debt forgiveness relief under the Act due to debt forgiven on a second home, rental property, credit card debt, business property, or some other form of debt, you may still qualify for tax relief under insolvency.