After Last year’s passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes. When a homeowner defaults on a home loan, a mortgage lender will sometimes “forgive” the debt owed.

Posted by Rob Kosberg

September 21, 2008

by Rob Kosberg

Sometimes a homeowner sells his property at a price lower than is owed on the mortgage. It can happen that the lender will decide to declare the debt fully paid and accept the lower price.

This is often called a “short sale” because the lender is “short” of the full amount owed.Prior to Thursday, the IRS treated the forgiven mortgage debt as taxable income. This added thousands of dollars to a foreclosed homeowner’s tax liability.

As an example, a homeowner owes $62,500 on a mortgage. He sells the home for $62, 500 and the tax liability is $12,500. Because of the passage of the bill the homeowner will not have to pay these taxes.

The bill has two sides, though. In order to recover the estimated $650 million in tax revenue that will be lost, Congress has limited the amount of tax breaks available on the sale of second/vacation homes. That will be impactful on homeowners, too, of course.

If you think the Mortgage Forgiveness Debt Relief Act of 2007 will impact you personally, be sure to talk with your accountant.

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