May 22 • 07:24 PM

Mortgage Debt Forgiveness Act of 2007

January 16, 2008

You helped me sell my home with what you called a short sale. The lender agreed to accept $20,000 less than I actually owed them. I certainly appreciate what you did as I saved my credit score by not going into foreclosure. I just received a 1099 from my bank stating I have $20,000 in additional taxable income. I remember you telling me that this would happen but I thought I heard something about the IRS changing this rule. Please help.

— A.R., Emmett

A.R., What you probably heard was the new bill signed into law that changes the former IRS rule requir-ing debt forgiveness to be considered taxable income. President Bush signed that law on December 20, 2007. It allows certain debts for-given by mortgage lenders to be exempt from taxable income. There are restrictions and limits so you should consult with your tax adviser regarding this issue. However, provided the debt forgiven was on your primary residence and not an investment or rental property then you shouldn't have to pay taxes on the $20,000 forgiven. This law is in effect for debt relief through 2010. I do not know if this law applies retroactively to pre-vious years. If you had a mortgage debt forgiven by your lender in 2006 or before you should consult your tax advisor regarding filing a new amended tax return. You may be able to get some money back. I also want to note that this law does not just apply to debt forgiven when you sell your home but also debt forgiven when refinancing your home. So if your lender or a new lender agrees to refinance your loan with a lower balance because of the decreased market value then that amount will not be considered taxable. The law before this was you would owe the taxes on the amount of debt relief even though you actually did receive that money. So A.R's debt relief of $20,000 would come with a tax due in April of $5000 based on a 25% tax bracket. A double whammy to those people who could not afford their mortgages also got hit with higher taxes. The new law changes all of that. Our own senator Debbie Stabenow had a big part in this legislation.

Alex Lengemann is a licensed Real Estate Broker who operates, a local real estate company. You can Ask Alex your real estate or mortgage questions by phone 810-664-1819 or by email


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