President Bush signs Mortgage Forgiveness Debt Relief Act of 2007 this week.
The bill will eliminate income tax on mortgage debt that has been forgiven by lenders on primary residence for people in financial hardships. In other words the IRS will no longer collect money from people who have worked out a deal with their lenders or after a short sale. The bill gives this debt relief for a period of 3 years a compromise between the House who wanted it permanently and the Senate and the President.
This will provide much needed relief to people losing their homes. As it stands now, a lender who forgives a debt must provide provide a Form 1099 to the IRS stating the amount the borrower has been forgiven. The rules apply whether it is a short sale, foreclosure, deed in lieu of foreclosure or any arrangement that relieves the borrower of the obligation to pay some portion of their debt. If the property is sold at foreclosure or is sold for less than was borrowed as in a short sale, the difference is considered income and is subject to the tax.
If someone sold their home with lenders approval for $25,000 less than they owe on the property, the IRS taxes that $25,000 as income. This will no longer be the case for the next years.
President Bush said "With this bill, Congress has taken a strong step to address the turbulence in the housing market. Yet there's more work to be done" at the signing