The Mortgage Forgiveness Debt Relief Act of 2007 - A Huge Relief If You Had To Short Sell Your Home

[stopbush]

One of the things bush did right.

If you were forced to short sell your home this year, you will be happy to learn that you may not need to pay taxes on the difference between what you owed the mortgage company and what you sold the house for.

In the past, a homer seller incurred tax liability in a short sale. So, if your home mortgage was $300,000 and you sold your home for $250,000, your mortgage company would report that $50,000 difference as INCOME that you earned, and you would owe taxes on that $50,000.

The Mortgage Forgiveness Debt Relief Act of 2007 all but eliminates the extra financial ‘hit’ a debtor would take due to tax liabilities. It was first introduced in the House in September, 2007 and finally signed into law by President Bush on December 20th, 2007. Now, the act is law and is termed Public Law No. 110-142.

Prior to this year, a debtor would suffer the loss of his home, negative impact to his credit rating and additional debt arising from federal tax laws that made the difference between what the home sold for and what he owed on his mortgage, taxable as income. The only escape from this new financial liability was to file bankruptcy which, regrettably, makes one’s credit terminally ill.

Public Law No, 110-142 (H.R. 3648) amends the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income and for other purposes. It does not, however, apply to homes purchased for investment and subsequently rented out. It only applies to homes where the owner has been in residence.

There are some limitations under the new act
The new law also reduces the income tax breaks on most gains from the sales of non-primary residences based upon a formula that considers the amount of time that the taxpayer actually lived in the property during the five years preceding the sale. And it limits the excludable amount of the indebtedness to $2-million and forbids the inclusion of indebtedness arising from services performed for the lender. There are other benefits and penalties as well. Perhaps most important, however, the new law keeps insolvent homeowners from taking an additional financial beating on a 1099 IRS gift of their short sale or foreclosure which only bankruptcy could do until this year.

You should check with your tax man to see if you qualify for this relief. I've spoken to many tax preparers who know NOTHING ABOUT THIS ACT! Don't be a chump. You may need to lead your CPA horse to water.

See here: http://www.debtkid.com/what-you-need-to-know-about-short-sale-tax-issues

[taught_me_patience]

1. This probably exacerbated the foreclosure problem n/t

[stopbush]

2. How? The only party that lost out was the tax collector.

The mortgage holder still took the loss. The home owner took a loss as well, but under this law, he didn't get hit with a tax bill for that loss.

BTW - short sales are a very small part of the mortgage industry. Much smaller than even foreclosures. While 80% of normal home sales are approved for a mortgage by a lender, only 18% of short sale requests are agreed to by the lender, and the lender must agree to the terms of a short sale or it can't happen.