According to the IRS, the Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence.
Discharge of debt is more specifically defined in Publication 4681. Generally, the Act includes debt forgiven via foreclosure, short sales and principal reduction.
The Act was designed to help homeowners avoid additional financial hardship created by short sales, foreclosure and mortgage restructuring. Therefore, debt forgiven on investment properties, vacation homes, and business properties does not qualify for this relief.
Like any ruling from the IRS, The Mortgage Debt Relief Act is easily misinterpreted. That said it would be prudent for any homeowners anticipating a 1099 to consult an accountant to determine if any expected reduction of debt is eligible under the Act.
Misunderstanding of the Mortgage Debt Relief Act can be found on numerous websites misstating the Act to be forgiveness of the deficiency loan balance resulting from a short sale or foreclosure. This is an incorrect representation of the Mortgage Debt Relief Act.
The Mortgage Debt Relief Act passed in 2007 was scheduled to expire December 2010. Legislation extended some of the Mortgage Debt Relief Act tax savings thru December 2012.
It is anybody’s guess as to whether or not further legislation will extend the expiration beyond December 2012.
The short sale process continues to be a long drawn out process therefore
any homeowner considering a short sale should consider
the consequences of not having the benefit of the
relief provided by the Mortgage Debt Relief Act.
Fortunately, some states like California have adopted similar laws on a state level.
Take the time to consult with a professional now while there is time and opportunity to make the most of this valuable relief.
Visit www.WendySmithShortSales.com for more information.
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