Impact of The Mortgage Forgiveness Debt Relief Act of 2007 on Homeowners Facing Foreclosure
One unanticipated consequence for the borrower working out a deal with the lender is that forgiven debt is still counted as borrower's income for tax purposes. The creditor has written off the debt, but the taxpayer cannot exclude it from his income. For example, if a borrower owes $100,000 on a credit card, and the credit card company settles the debt for $50,000, the $50,000 the borrower is no longer required to pay back, is still considered income.
The Mortgage Forgiveness Debt Relief Act of 2007
Previously, the homeowner who paid less than his originally required mortgage could avoid a significant tax liability only if the borrower could prove insolvency. This was a complicated process and sometimes impossible to prove. The Mortgage Forgiveness Debt Relief Act of 2007 (set to expire at tne end of 2013) makes an exception for certain situations involving mortgages. The Act permits borrowers to exclude from income amounts forgiven on the borrower’s principal residence. The Act does not apply to investment properties or second homes, and it only applies to residential mortgages. It does not apply to credit cards or car loans. The exclusion is also limited to $2 million ($1 million if married and filing separately).
Consider consulting a tax attorney in a foreclosure situation to find out your liabilities.