The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007. Generally, the Act allows an income tax exemption for a homeowner that has income realized as a result of a loan modification, short sale or foreclosure.

The Act is set to expire at the end of this year (December 31, 2012). This means that if anyone wishes to take advantage of the benefits of this Act, they must complete their modification, short sale or foreclosure on or before Dec 31, 2011.

Matt Alegi, a partner with the Potomac law firm Shulman Rogers and chair of the firm’s residential real estate practice group, says the tax break has meant a savings in the tens of thousands of dollars for individuals.  Typically, if someone were to have $150,000 forgiven by the bank, Alegi says, “you just made another $150,000 of income for tax purposes in that year.”  So, say someone makes $50,000 but had $150,000 forgiven by the bank, that person is now paying taxes on a

200,000 income, and included in a much higher tax bracket.  The loss of the relief will plunge homeowners further into debt, Alegi says.

Alegi also believes that the upcoming expiration of the Debt Forgiveness Act will have an impact on short sales.  Any homeowner considering a short sale should make a push to complete it this year in order to take advantage of the tax breaks. 

We believe that there will be strong lobbying to extend the tax break.  If it isn’t extended, it could result in very serious tax consequences for many homeowners.

To take advantage of the Debt Relief Act, you need to fall under very specific guidelines outlined by the IRS.  For example, the debt forgiven is only for primary residences and the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.  And please remember, this is only provided in general terms. If you are considering a short sale or foreclosure, please make sure to contact your tax consultant or CPA to further explore the possible tax consequences. If you do not have someone, make sure to contact us and we will put you in touch with a

If you are facing foreclosure or have any questions regarding a short sale and the foreclosure process, please do not hesitate to contact our team. We specialize in San Diego Short Sales, Orange County Short Sales and Riverside Short Sales.