As part of tax bill H.R. 8, which addressed the so
called “fiscal cliff,” On January 1, 2013, Congress
passed an extension of the Mortgage Forgiveness
Debt Relief Act of 2007.
For distressed homeowners, the extension of this
act comes as welcome news, as it means foreclosure
alternatives, such as loan modifications and short
sales, will continue to be valuable options free of
tax penalties on forgiven debt. This report details
how the extension of the Mortgage Forgiveness Debt
Relief Act will save these homeowners thousands in
taxes, and what to do if you or someone you know
find yourself facing the possibility of foreclosure.
What Is The Mortgage Forgiveness
Debt Relief Act?
The Mortgage Forgiveness Debt Relief Act was
originally passed in 2007 to aid the millions of
homeowners who suddenly found themselves in
danger of losing their homes to foreclosure following
the housing market crash.
Under the Mortgage Forgiveness Debt Relief Act, any
debt forgiven in a short sale, foreclosure, or loan
modification is exempt from federal taxes.
Here’s how the process worked before the Mortgage
Forgiveness Debt Relief Act:
• A homeowner found that he or she could no longer
afford his or her mortgage. At risk of default and
foreclosure, the homeowner was able to negotiate
with the bank an option that avoided foreclosure
(most likely a short sale or a principle reduction).
• The bank was legally required to report the amount
of debt forgiven or cancelled to the IRS.
• The IRS labeled this amount as “income.” Even
though the homeowner was never given any cash
from the bank, it was considered income because it
was a credit issued to the borrower from the bank
that didn’t previously exist.
• The homeowner was now responsible for paying
income tax on this amount, which could amount to
tens of thousands of dollars.
With the recent extension of the Mortgage
Forgiveness Debt Relief Act, eligible homeowners
will continue to remain exempt from these taxes,
saving them from paying thousands, or even tens of
thousands, in taxes on top of losing their homes.
When does the Mortgage Debt Relief Act Expire?
December 31, 2013.
How much debt can be forgiven?
$2 million ($1 million if you are married and
Does this apply to any debt that is forgiven?
No, the Mortgage Debt Relief Act applies only
to debt forgiven on your primary residence.
Who determines how much debt is forgiven?
The lender is required to report any forgiven
debt that is over $600.
Will be reported on my credit?
If a foreclosure was started, then it probably
will be, although it will be less impactful than
if the foreclosure is completed.
Short Sale Specialist - Helping people find a way out of foreclosure