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Chris Pendleton


Shannan Marty

Associate Broker - Realtor®, ABR®,CDPE, CSP, CNE, CSSN, SFR, a-REO, PSC

In the eyes of the IRS - debt forgiveness can be seen as ordinary income. However, there is the Mortgage Forgiveness Act of 2007 that has been extended until 2012. It is important to seek independent tax advice because there are hoops to jump through and everybody's situation is different.


What is the Mortgage Forgiveness Act?

The crisis of our economy has rendered soaring short sales and foreclosures in the housing market.  Lenders have been bombarded by repossessed properties called foreclosures.  Lenders have been willing to let homeowners sell their homes for less than the mortgage.  This is called a short sale. The amount of loss that a lender occurs on properties is called a deficiency.  The loss may be forgiven by the lender.

Did you know that a forgiven loss is considered income and is taxable?  This is a further distress to homeowners who have short sold or have their homes foreclosed on.

The US government has provided relief for these homeowners in the Mortgage Forgiveness Act of 2007.  The Mortgage Forgiveness Debt Relief Act was enacted in December, 2007. This act allows exclusion of income as a result of mortgage modification or foreclosure on your principal property. This relief provided for the years of 2007-2012.

Thorough information about this act is provided on the IRS website: www.irs.gov. Homeowners whose mortgage debt is partially or entirely forgiven may qualify for relief.

In normal circumstances debt forgiveness is taxable income.  With the mortgage forgiveness Debt Relief Act of 2007, a sum of up to two million dollars is forgiven on your principal residence. The limit is one million for a married person filing a separate return. Debt may also be excluded through a mortgage restructure.

To qualify for the mortgage debt relief consider these facts:

The debt incurred must have been used to build, buy, or substantially improve your primary residence as well as secured by that residence. Refinanced debt proceeds for the use of improvement of your primary residence also qualify.

Refinanced debt for other purposes such as paying off credit cards does not qualify. Second homes, business and rental properties don’t qualify under this provision

There is a form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) that can be filled out and attached to your federal income tax form.

After the debt is forgiven, a homeowner will receive a 1099 –C form.  This form will show the amount of forgiven debt as well as the fair market value of the property.

If you debt does not apply under the Mortgage Forgiveness Act, your debt could qualify under an insolvency exclusion. Taxpayers are not required to include all forgiven debts in their income.  Homeowners are allowed to exclude the amount that exceeds total assets.  A title 11 bankruptcy, farm indebtedness or qualified business indebtedness may allow apply for exclusion. Check the 982 form for instructions.

Always double check with a CPA or an attorney for further advice and questions.