Frequently Asked Questions from
the Internal Revenue Service (www.irs.gov)
What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007. Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage (i.e., sort sale), or foreclosure of your principal residence.
What does that mean?
Usually, debt that is forgiven or cancelled by a lender must be included as (ordinary) income on your tax return and is taxable. The Mortgage Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.
Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts?
No, the Act applies only to forgiven or cancelled debt used to buy, build, or substantially improve your principal residence, or to refinance debt incurred for those purposes.
What about refinanced homes?
Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.
Does this provision apply for the 2007 tax year only?
It applies to qualified debt forgiven in 2007, 2008, 2009.
Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.
If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. 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. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness.
Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven.
Articles:
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- California Foreclosure Laws
- What Happens in a Foreclosure?
- Ways to Avoid Foreclosure
- Foreclosure Scams and How to Avoid Them
- Commonly Asked Questions About Short Sales
- Discrepancies in Your Loan? Try a Qualified Written Request
- Frequently Asked Questions from IRS.gov
- Information on SB 1137-The Perata Mortgage Relief Bill
Videos:
- CNN Video: Modifying Your Loan
- Bloomberg: Your Money - Avoid Foreclosure
- Bloomberg: Your Money - Facing Foreclosure
- From CBS News: Foreclosure Rescue Squad
- From CBS News: Ways to Avoid Foreclosure
Links:
