The Mortgage Forgiveness Debt Relief Act of 2007 has lessened an important concern for foreclosed homeowners, taxes. This has been a worry when a lender decides to “forgive” some of the debt.
One example is when a foreclosed home sells for less money than is owed on it. The mortgage lender will sometimes accept this lesser amount, while considering the mortgage to be “paid in full”.
This is often called a “short sale” because the lender is “short” of the full amount owed.Prior to Thursday, the IRS treated the forgiven mortgage debt as taxable income. This added thousands of dollars to a foreclosed homeowner’s tax liability.
For instance, there could be $12,500 in taxes owed from $50,000 “short sale.” Since the bill was passed, the homeowner will not have to pay tax when a lender accepts a lesser amount and “forgives” the debt.
The bill has two sides, though. In order to recover the estimated $650 million in tax revenue that will be lost, Congress has limited the amount of tax breaks available on the sale of second/vacation homes. That will be impactful on homeowners, too, of course.
If you think the Mortgage Forgiveness Debt Relief Act of 2007 will impact you personally, be sure to talk with your accountant.
Filed under: Sales