Mortgage Debt Relief in Effect Until 2012.

Before The Mortgage Debt Relief Act of 2007, you would owe taxes on any amount of debt that was canceled or forgiven. The Mortgage Debt Relief Act allows those who cancel or reduce mortgage debt through mortgage restructuring or foreclosure to avoid paying taxes on the amount forgiven. It’s a good thing too – Can you imagine the psychological and financial blow this would be for the millions of homeowners losing their homes to foreclosure today?

The act covers up to $2 million (or $1 million, if filing separately).

Cancellation of Debt.

The IRS defines the cancellation of debt as any money borrowed from a commercial lender that is later forgiven. Outside the coverage of the relief act, you would have to declare this debt for tax purposes.

“When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C”

When Cancellation of Debt income is not taxable.

Here are some of the most common situations where you would not owe taxes on the canceled amount:

• When the canceled debt is covered by the The Mortgage Debt Relief Act of 2007
• Debts discharged through bankruptcy
• When the total debt is more than the fair market value of your total assets (insolvency), some or all of the canceled debt may not be taxable.
• If the debt was due directly to the operation of a farm and more than half your income from the prior three years was from farming and the loan was owed to a person or agency regularly engaged in lending, your canceled debt is generally not considered taxable income.

Type of Debt Covered by the Act.

The Mortgage Debt Relief Act applies only to debt used to purchase an existing home, build a new home, or substantially improve your primary residence, or to refinance debt incurred for those purposes. The debt must be secured by the home, and the maximum amount exempted by the act is $2 million or $1 million if married filing separately.

The Mortgage Debt Relief Act of 2007 is in effect until 2012, and more information can be found here.

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