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The Mortgage Forgiveness Debt Relief Act is a temporary law designed to provide aid in the form of tax relief to individuals who owe a significant tax debt due to the foreclosure or short sale of their primary residences.
How the Tax Relief Program Works
Foreclosures and short sales often occur on homes for which the mortgage loan debt is greater than the value of the house. Thus, only a portion of the debt is absolved by the foreclosure or short sale. The remaining debt is a mortgage deficiency. Prior to 2007, if a lender chose to forgive a mortgage deficiency rather than sue the borrower, the borrower would be required to claim the forgiven amount on his taxes as additional income. The Mortgage Forgiveness Debt Relief Act provides tax relief for qualifying homeowners with forgiven mortgage deficiencies.
Qualifying for Tax Relief
Only borrowers who have a forgiven mortgage deficiency after the foreclosure or short sale of their home qualify for tax relief. If your lender pursues you for the debt, you can be held legally liable for the full mortgage deficiency and do not receive a tax break. If your home was a vacation home, you may be eligible for partial tax relief if you can prove that you lived in the home for a portion of the tax year. The Mortgage Forgiveness Debt Relief Act expires on December 31, 2012 and the previous tax laws will once again apply to all debtors.
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