Why You Should Care About the Expiration of the Mortgage Debt Forgiveness Act

The Mortgage Debt Forgiveness Act of 2007 has been a tremendous help to homeowners who have had to modify their loan or have had to foreclose. But the Act expires at the end of this year. Here’s everything you need to know about the Act. If you’re ready to short sale your home in order to take advantage of of the debt forgiveness act, email Sue at slapeter@aol.com.

Why does the Mortgage Debt Forgiveness Act of 2007 exist?

Federal law requires that any debt forgiven, over $600, be taxed because it is seen as income. So, if you had a debt of $1,000, and that debt was forgiven, the government would see that as a $1,000 income and would tax you on it.

During the recession, thousands of people where loosing their homes to foreclosure or short sale, or they modified their loan to make payments more affordable. Any debt that was forgiven in that process was taxed. But as we all know, lack of jobs and income, the stock market crash and loss of homes made it impossible for many people to pay the taxes on their forgiven debt. Consequently, the government created the Mortgage Forgiveness Debt Relief Act of 2007.

What is the Mortgage Debt Forgiveness Act of 2007?

The Mortgage Debt Forgiveness Act of 2007 prevents the government from taxing people on the amount of debt forgiven as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. So, if the principal on your loan is reduced, if your interest rate is modified, if you short sale your home or if you’re foreclosed on, you will not be taxed for the amount of money forgiven.

Is the Act permanent?

No. It is set to expire December 31, 2012. In order to take advantage of the Mortgage Debt Forgiveness Act, homeowners must COMPLETE refinancing, a short sale or a foreclosure by December 31. The process for completing these can often take months, so if it’s in your best interest to refinance, short sale or foreclose, now is the time to do it.

Other things you should know.

• The Mortgage Debt Forgiveness Act is good on amounts up to $2 million, or $1 million if you are married but filing separately.
• The law only applies to primary residence, and debt incurred to buy, build or improve a primary residence.
• To qualify, you must claim the special exclusion by filling out form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attaché it to your federal income tax return for the tax year in which the qualified debt was forgiven.
• For more information, visit the IRS government site and LA Times.

Photo taken from Stuart Miles/ FreeDigitalPhotos.net

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