Wednesday, January 21, 2009

Mortgage Forgiveness Debt Relief Act

The banks are really feeling the heat as a result of the real estate market crisis and the rise of home mortgage foreclosures. During the recent U.S. real estate boom, some lending institutions abandoned all caution. Lending policies became extremely lax. Dubious loans—such as the so-called “Ninja” (no income, no job or assets) loans—became increasingly commonplace. Many banks made these bad loans because it was assumed that the price of the home would always appreciate. What a surprise these lenders got when the real estate market bottom fell out.

In December 2007, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007. It will rescue many families facing foreclosure on their personal residences. The Mortgage Debt Relief Act of 2007 generally 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 provision applies to debt forgiven in calendar years 2007 through 2012.

  • Up to $2 million of forgiven debt is eligible for this exclusion.

  • $1 million if married filing separately.

  • The exclusion can be used only if the loan was taken out to acquire, build or substantially improve a principal residence. Forgiveness of debt on vacation homes, second homes and investment property doesn't qualify.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

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