Mortgage Forgiveness Debt Relief Act: How it Can Lower Your Taxes

The Mortgage Forgiveness Debt Relief Act is a government program designed to help provide tax relief to individuals who have lost their homes to foreclosure. The act is temporary and ends December 31, 2012.

A Mortgage Deficiency Can Have Tax Consequences

After a lender forecloses on your home, it attempts to sell the property to recoup its losses. If the property sells for less than the outstanding balance on your mortgage loan, you are left with a mortgage deficiency. Your lender may choose to collect the mortgage deficiency from you via a lawsuit or write off the deficiency as a business tax deduction.

When a creditor writes off a debt on its taxes, the debtor must then claim the full amount of the debt as income. Given that a mortgage deficiency can total thousands of dollars, your foreclosure could leave you with a substantial tax debt.

Tax Relief for Former Homeowners

The Mortgage Forgiveness Debt Relief Act temporarily repeals the tax law that requires consumers to pay taxes on forgiven mortgage deficiencies. The new law went into effect in 2007 to provide limited relief to the thousands of homeowners losing their homes to foreclosure. Not all individuals qualify for tax relief after foreclosure, however. If your lender forgives a deficiency balance on a home that wasn’t your primary residence, you must still adhere to the previous tax regulations and pay taxes on the forgiven debt.

blog comments powered by Disqus