Mortgage Forgiveness Debt Relief Act - Incentive to Short Sale vs. Foreclosure

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.

Many homeowners don't realize that when they allow the bank to foreclose that the amount of debt lost can be realized as taxable income. Foreclosure follows the borrower for years to come vs. doing a short sale.

Specializing in foreclosure prevention, I've helped many people avoid foreclosure through short sale. I'm currently working with Chase Bank on behalf of a homeowner in the neighborhood of Riverpark in Oxnard, CA which is located in Ventura County.