The Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA) offers relief to homeowners by exempting them from taxes owing on forgiven mortgage debt. Prior to this Act, any time a lender canceled a debt, the forgiven amount was considered income to the debtor and, therefore, could be taxable.
Benefits of the MFDRA
In difficult economic times, this new law is good news for homeowners struggling to keep up with rising interest rates and declining property values. The Act provides a couple of key advantages that could help those facing foreclosure.
Removing the tax liability increases the incentive for borrowers and lenders to work out a solution for refinancing loans and securing lower payments. This may allow homeowners to keep their property rather than face foreclosure.
Without the burden of additional tax obligations, homeowners now have a way to sell their home for less than they owe, also known as a short sale, and avoid having a foreclosure on their record.
The Mortgage Forgiveness Debt Relief Act could be a welcome relief to those caught in the middle of the subprime housing crisis, but this temporary provision does have restrictions. It is important to understand how it applies to your particular situation.
How Long Is the MFDRA in Effect?
This relief applies to mortgage debt discharged in the calendar years 2007-2012.
Does This Relief Apply to All Canceled Debt?
Tax exemptions apply only to debt that has been used to buy, build, or improve the homeowner’s primary residence, and includes any forgiven debt resulting from loan modification, foreclosure, or short sale of this residence. Home equity loans that were not used for home improvement do not qualify, nor do mortgages on second houses or rental properties.
Does Debt Forgiveness Have To Be Reported?
Any tax relief must be reported on IRS form 982 and attached to the tax return. Lenders will issue Form 1099-C, which will indicate the forgiven amount to be claimed for exemption.
Is There a Limit on Exemption Amounts?
A borrower may claim an exemption on forgiven debt up to a limit of $2 million. A married person filing separately may claim a maximum of $1 million.
If you think you may qualify for a tax exemption on forgiven debt, it is important to contact a tax consultant or expert to see how the Mortgage Forgiveness Debt Relief Act of 2007 and the Emergency Economic Stabilization Act of 2008 could help you.