Mortgage Debt Relief Act of 2007 Coming to an End

Filed under: Short Sales

On December 31, 2012 the Mortgage Debt Relief Act of 2007 is expiring.  This piece of legislation allowed taxpayers to exclude income from the discharge of debt on their primary residence.  Debt reduced through mortgage restructuring, foreclosure, or forgiveness of debt qualifies for this exemption.

In a simplified model, here is a quick explanation:

Let’s say you purchased a home for $300,000 with a 10% down payment and a $270,000 loan.  Due to market conditions, perhaps your home depreciated in value and is now worth only $190,000 yet you still owe $250,000.  If you complete a short sale for $190,000 and the bank accepts this as full payment on your loan, the remaining $60,000 is considered cancellation of debt and you could be taxed on that amount.  The Mortgage Debt Relief Act protected sellers from the tax liability on the cancelled debt.

The MDRA could be extended, but in an election year you may not want to count on it happening quickly.  Instead, if you or someone you know is considering a short sale, the time to act may be now.

PLEASE consult a tax professional for further advice on this topic.  You can also refer to the IRS website regarding the Mortgage Debt Relief Act of 2007 by clicking the link below.

Click here to access the IRS site now

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