The Mortgage Forgiveness Act: Will It Be Extended?

Dec 8th, 2012 | By | Category: Lead Article

As the year winds down, we are getting more and more inquiries about the Mortgage Forgiveness Debt Relief Act of 2007 and whether or not it will be extended past its original expiration date of December 31, 2012. This is important as people who are selling their home through a short sale may be faced with a tax liability if they don’t close by the aforementioned date.

Here is the way the IRS explains the tax liability:

“If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in       income for tax purposes, depending on the circumstances. When you        borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that        obligation is subsequently forgiven, the amount you received as loan        proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C,         Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.”

What does the Act accomplish?

Let’s go back to the IRS for the explanation:
“Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt     forgiven in connection with a foreclosure, qualifies for the relief.”
(For more information on the ACT from the IRS go to: www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-)
This relief also applies to most short sales. Therefore, the question of whether or not the Act will be extended is crucial for anyone considering selling their house through the short sale process.

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