Homeowners May Face An Unexpected Tax Bill

The Mortgage Forgiveness Debt Relief Act has been allowed to expire.  Before this law was passed in 2007, a homeowner who had a portion of his or her mortgage written off by a lender was considered to have received a taxable benefit equal to the amount of debt forgiven.   This rule applied to short sales, some types of modifications, and other forms of foreclosure work out options where a portion of the mortgage debt was waived.  As a result, before this Act, a homeowner could lose his or her home and still pay taxes on the amount of the home mortgage that was unpaid.  The Mortgage Forgiveness Debt Relief Act waived the taxable status of the event, which has been an important incentive to utilize foreclosure prevention options.

The Act had been routinely extended from 2007 until the end of 2013, but has now been allowed to expire.  There are bills pending in congress to re-authorize the Act, and there is another IRS rule for “insolvency” that could protect some of the same transactions.  However, every homeowner facing foreclosure should seek advice from a tax professional to address the implications of the expiration of the Act.  Many members of the real estate and mortgage industry are not aware of these implications.

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For a different point of view, see the discussion here, 

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