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Re-Post - The Difference Between the Mortgage Forgiveness Debt Relief Act of 2007 and State Anti-Deficiency Laws

By
Services for Real Estate Pros with The Law Offices of Elisabeth A. Lambert 236274

A week or so ago, I wrote a post detailing the Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA) because I'd read a number of posts where the authors confused the MFDRA with their state's anti-deficiency laws. That post was lost when AR timed out on me when I went to publish the post.

If you want to get the information from the horse's mouth (the IRS) here's a link to the IRS publication regarding the MFDRA. I'm summarizing it below.

The main difference between MFDRA is who is providing the protection. MFDRA is federal law and applies to your federal income taxes. Anti-deficiency laws vary state by state and protect the borrower from the lender holding them liable for the deficiency (the difference between the amount owed and the actual sale price) in a short sale or foreclosure.

What is the MFDRA 2007

As a response to the mortgage and credit crisis, Congress passed this Act in late December of 2007 It generally, permits a taxpayer to exclude the forgiveness of cancellation of certain debt from counting as ordinary income on their federal taxes if the property at issue is the taxpayer's principal residence. Cancellation or forgiveness of debt usually occurs when the lender modifies the terms of a mortgage, accepts a short sale or forecloses on a property. MFDRA will apply to forgiveness and cancellation of debt occurring in 2007, 2008 or 2009.

Prior to December 2007 Mortgage Debt Relief Was Handled Differently

Prior to the enactment of the MFDRA, when a lender offered to modify the terms of the loan by either forgiving or canceling debt, the taxpayer would have to include the debt relief amount as ordinary income.

For example, if there was $300,000 owed on the taxpayer's principal residence and the property only sold for $250,000, prior to MFDRA, the taxpayer would have to show the debt relief of $50,000 as income on his/her taxes.

With the MFDRA, the taxpayer does not have to include that $50,000 debt relief as income.

Debts to Which the MFDRA Applies

Not all forgiven or canceled debt qualify for MFDRA treatment. It only applies to forgiven or canceled debt that was used to buy, build or substantially improve the taxpayer's taxpayer's principal residence.

What Happens With REFINANCED HOMES?

Debt used to refinance a taxpayer's home will qualify up to the extent that the principal balance of the old mortgage, immediately prior to refinancing would have qualified.

What About Debt Forgiveness on a second home, credit cards or car loans?

This property DOES NOT QUALIFY for MFDRA treatment. Only canceled debt used to buy, build or improve the taxpayer's principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

Check With Your Tax Advisor Because If Part of the Forgiven Debt Doesn't Qualify for Exclusion from Income, It May Qualify Under A Different Provision

The forgiven debt may qualify under the "insolvency" exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. There are additional exclusions that may be explored with your tax advisor.

What are Anti-Deficiency Laws

Anti-deficiency laws differ by state and usually protect the borrower from being liable for the difference in the sale price of the principal residence and the amount owed on the principal residence. If a borrower is protected by anti-deficiency laws, it protects them from the lender holding the borrower liable for the deficiency. Many restrict this protection to purchase money loans only, so if the property is refinanced then the borrower may lose the protection of the anti-deficiency laws. I will cover this in more detail in a future post.

THIS INFORMATION IS PROVIDED FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. IT IS NOT TAX OR LEGAL ADVICE. INDIVIDUALS ARE STRONGLY ENCOURAGED TO SEEK THE GUIDANCE OF THEIR OWN TAX AND LEGAL ADVISORS FOR ADVICE REGARDING THEIR SPECIFIC FACTS AND CIRCUMSTANCES.

Please remember me and Asset Preservation, Inc. for all of your 1031 exchanges and questions.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

Comments (12)

Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Mirela:

Here's the re-post you requested.

Lisa

Jun 26, 2008 05:18 PM
Chris Lambos
Poplar Hill Realty - Bellevue, TN

Nice work, Lisa!

How are you enjoying AR?

Jun 26, 2008 05:24 PM
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Chris:

Thanks so much. I'm LOVING AR, especially the groups and Mirela's subscribers. What a great group of people!!

Lisa

Jun 26, 2008 05:28 PM
Chris Lambos
Poplar Hill Realty - Bellevue, TN

I'm the same way...perhaps I'm limiting myself in some ways by not grazing in other pastures, but it's more of a personal thing for me...some blog for business purposes (or for points), but I'm here because I have fun in the group (Mirela's pals).

From Chuck and George's insight, to Tamara's Eco-Knowledge...your 1031 Exchange savvy...Mirela's thought-provoking posts (and humor) ...Sundays With Sylvie...Liz's beautiful hair....George's wit...

There is something here for everybody!

 

(Hey Tamara, Tuna is not UME...but not bad, eh?)

Jun 26, 2008 05:42 PM
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Chris:

It started out primarily being business for me but my participation has rapidly become personal. I've made such great friends here.

I haven't gotten to know Chuck, Liz or George yet. I've greatly enjoyed Tamara's, Sylvie's aand your comments.

And yes, Mirela's post are always thought provoking and entertaining.

Lisa

Jun 26, 2008 05:51 PM
Mirela Monte
Buyers' Choice Realty - North Myrtle Beach, SC
Myrtle Beach Real Estate

Wow!  Chris, you are our best PR guy! 

Lisa: If you had just added the Optimist group to the original post which you also submitted to the Realtors group, we could have kept it going and garnered you more comments.  Every time someone in our group comments on it, it brings it to the top on the other boards as well and in the end you end up with substantially more comments.  Just a thought... 

Also, I'm sure other groups would appreciate this blog, and you are allowed to post to 5 different groups, so you might as well maximize its mileage and submit to three more groups.  The art of marketing you is quite popular, as is the AR Lounge and the out of the box group.  Perhaps the Independent brokerages group might also garner you some potential clients...

Thank you for giving this to us!  May I also reproduce it on our company's blog?

Jun 26, 2008 05:56 PM
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Mirela:

I didn't post it to the Optimist Group the first time because I wasn't sure whether the subject matter was appropriate. In the future, I'll submit all of my posts to The Optimist group. This is a great group and I'm so enjoying the camaraderie here.

You may absolutely reproduce it on your company blog.

Lisa

Jun 26, 2008 05:59 PM
Mirela Monte
Buyers' Choice Realty - North Myrtle Beach, SC
Myrtle Beach Real Estate

Thank you very much!  I'll do it right now! 

Thank you!  Thank you!  Thank you!

Lisa, you make me look good (I have smart friends)!

Jun 26, 2008 07:00 PM
Mirela Monte
Buyers' Choice Realty - North Myrtle Beach, SC
Myrtle Beach Real Estate

As for the Optimist group: I try to keep the group both entertained and up to date on the latest in Real Estate.  Anything that will improve our lives or business is relevant here.

Jun 26, 2008 07:06 PM
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Good to know. I'll be posting regularly to The Optimist Group.

Jun 27, 2008 07:44 AM
Jon Michael
DeGeorge Realty LLC - Long Branch, NJ

Thanks for the post, it was very informative...really cleared this subject up for me.

Jul 01, 2008 06:34 AM
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Jon:

Thanks so much for stopping by and leaving a comment. I really appreciate it.  I'm glad you found the information useful.

Lisa

Jul 01, 2008 09:27 AM