What is the Mortgage Forgiveness Debt Relief Act of 2007?
Initiated by President Bush, this Act was a tax break that saved struggling homeowners from paying thousands of dollars to the IRS. Namely, qualifying borrowers (generally struggling homeowners) in certain situations would not be responsible for paying taxes on any of the forgiven debt associated with a short sale, a foreclosure, or a deed-in-lieu of foreclosure.
Lenders report the amount of debt forgiven on the 1099-C, which is sent to the borrower. It is the borrower and his (or her) accountant that would be responsible for addressing the debt forgiveness correctly when completing income tax filings.
Prior to the enactment of the Mortgage Forgiveness Debt Relief Act of 2007, if the short sale lender forgave debt, borrowers were responsible for paying the income tax on the amount of forgiven debt at their current tax rate. Remember that the current Act does not apply to all short sales, foreclosures, or deeds-in-lieu.
Currently, the provision applies to mortgage debt forgiven through the end of 2013. So, for those qualifying borrowers participating in short sales, the only way that they might be able to receive the benefits of this provision is if the sale is completed prior to the end of the year.
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