The Mortgage Forgiveness Debt Relief Act was a temporary law enacted in 2007 to assist homeowners who were underwater on their homes, and were considering a short sale or who faced foreclosure. The IRS considers any housing debts that is forgiven or written off by a lender as income. This bill exempts the homeowner from paying federal taxes on the balance of their mortgages after a short sale or foreclosure.
This tax break was due to expire on Dec. 31, 2012, those homeowners involved in a short sale, loan modification or even facing foreclosure along with other industry related professionals were gravely concerned about the extension of the bill. Many realized if the bill was not extended it could have a grave impact on a housing market struggling to survive.
The bill was part of the “Fiscal Cliff” legislation and was extended until the end of 2013. Many homeowners were holding their breath, knowing if the bill was not extended there was no way they could pay the tax bill resulting from a short sale, loan modification, or foreclosure, fortunately they did not have to turn blue. Congress came through.