The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007. The IRS generally considers the forgiveness of debt as a taxable income to the person that receives the forgiveness. (This is not tax advice. Please contact your tax attorney, CPA or other tax professional before making a business decision.)
Imagine Joe owes $100,000 to Frank. Joe only has $80,000. Frank agrees to let Joe pay him $80,000 and he will forgive the rest. Frank wants to claim the loss of $20,000 on his income taxes. In order to do so the IRS requires him to file a 1099-C for cancellation of debt. The 1099-C names Joe as the recipient of that $20,000 of “income” on which Joe is now liable for taxes.
The Mortgage Forgiveness Debt Relief Act allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This act only applies to debt on your primary residence and not investment properties or second homes.
Time is Running Out
The Mortgage Forgiveness Debt Relief Act was set to run from 2007 through 2012. It is set to expire on December 31, 2012. Depending on Congress this act may not be extended beyond its initial term.
This means that short sales must be done prior to 2013 in order to qualify for forgiveness under this act. If you are considering a short sale of your primary residence, now is the time to list if there is any hope of closing prior to 12/31/2012.