The Mortgage Forgiveness Debt Relief Act of 2007 has provided relief to thousands of borrowers who have completed short sales or obtained loan modifications with mortgage principal reductions. Before this law was enacted, any forgiven mortgage debt was taxable by the government. For example, if a lender reduced a borrower’s principal balance by $100,000.00, then the borrower would have to report that forgiven debt as ordinary income and pay taxes on it. This was, of course, impractical and unreasonable for borrowers who were already experiencing financial hardship and were relying on modifications or short sales to save them from foreclosure. Most borrowers could not afford their tax bills and were stuck in the same situation as they were in before they had requested help from their lenders.
Under The Mortgage Forgiveness Debt Relief Act of 2007, borrowers do not have to pay taxes on cancelled mortgage debt as a result of a modification or foreclosure of their primary residence. This act was originally supposed to end at the end of 2012, but it was granted an extension through 2013 on the third day of the new year.
An extension may be granted through 2014, but it is unlikely. Both H.R. 2788 and H.R. 2994 are bills that will extend The Mortgage Forgiveness Debt Relief Act for at least another year, but they were each referred to committee over the summer and have received no attention since. There are 44 cosponsors for H.R. 2994, but it is already now the middle of December and time is running out. In order for this bill to be enacted, it still needs to pass the House and Senate and it must get signed by the President before December 31, 2013. It is improbable that an extension will be granted, but not impossible; especially with the economy rebounding and many forgetting the plight of those left behind. It’s important to not forget these individuals that still need relief and who have often spent years trying to get a modification or a short sale approved only to now be taxed when they finally get the relief that they have hoped for.
So for them, please tell your local representative how important it is that these Bills are passed and The Mortgage Forgiveness Debt Relief Act of 2007 is extended for another year.
Thank you to Lieb at Law's Assistant Case Manager, Jessica Vogele, for sharing this valuable information.