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Mortgage Debt Forgiveness: the Catch

While in the midst of the fallout of the housing crisis, many homeowners are struggling to balance massive amounts of mortgage debt. Some may believe that an agreement to forgive all or even a portion of their debt will solve the matter. Unfortunately, the Internal Revenue Service (IRS) can require the borrower to pay taxes on the forgiven amount.

The IRS requires that the forgiven debt amount be included as income on tax filings. This mandate applies generally to common forms of mortgage debt forgiveness like reduction of debt when a loan is restructured or forgiven in connection to a foreclosure.

Mortgage Debt Relief Act of 2007

In response to the recession and housing crisis, exceptions have been granted for certain types of forgiven debt received between the years of 2007 and 2012. The Mortgage Debt Relief Act of 2007 includes a provision specifically excluding tax payments on debts forgiven for:

  • Mortgage loan modification
  • Mortgage debt forgiven in foreclosure
  • Mortgage debt forgiven in bankruptcy

In addition, the provision allows for a broader application by including insolvent home owners. The insolvency requirement is satisfied when the total debts owed on the home are more than the home’s fair market value. This serves as a type of umbrella, intended to provide relief for most struggling home owners who are upside down on their loans.

The act allows up to $2 million in forgiveness for married couples or $1 million if a couple is married filing separately. It applies only to debt secured by the home used to “buy, build or substantially improve your principal resident, or to refinance debt incurred for those purposes.”

Debt forgiven on second homes, rental property, credit cards or automobile loans do not qualify for the relief offered within this provision.

Navigating the intricacies of this piece of legislation can be difficult, but relief is available. If you or a loved one is struggling to make mortgage payments or facing foreclosure, it is important to contact an experienced foreclosure attorney to review your situation and protect your legal rights.

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