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How Congress Is Providing Tax Relief To Foreclosed Homeowners

December 21, 2007 by Scott Kinne

After the December 2007 passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes

After Thursday’s passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes.

When a homeowner defaults on a home loan, a mortgage lender will sometimes “forgive” the debt owed.

One example is when a foreclosed home sells for less money than is owed on it. The mortgage lender will sometimes accept this lesser amount, while considering the mortgage to be “paid in full”.

This is often called a “short sale” because the lender is “short” of the full amount owed.

Prior to Thursday, the IRS treated the forgiven mortgage debt as taxable income. This added thousands of dollars to a foreclosed homeowner’s tax liability.

A $50,000 short sale, for example, could yield an additional $12,500 in taxes owed.

After the bill’s passage, that tax liability is gone. No taxes will be owed on primary residence mortgage debt that is forgiven or written off by a mortgage lender.

The bill has two sides, though.

In order to recover the estimated $650 million in tax revenue that will be lost, Congress has limited the amount of tax breaks available on the sale of second/vacation homes. That will be impactful on homeowners, too, of course.

If you think the Mortgage Forgiveness Debt Relief Act of 2007 will impact you personally, be sure to talk with your accountant.

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Scott Kinne

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skinne@fhmtg.com

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