As a Real Estate Broker, it's my job to stay on top of the latest news when it comes to how things that can help or hurt my clients.
Many people have asked us about The Mortgage Debt Forgiveness Act.
Originally passed in 2007, was extended three times to protect homeowners from paying income tax on debt that was relieved due to foreclosure, short sales or deed in lieu of foreclosure.
The law expired on December 31, 2016, and unless it is extended again, homeowners with debt relief in 2017 may be subject to tax.
A homeowner might feel a sense of relief without the obligation of a delinquent mortgage but just because the payments are no longer due doesn’t mean that there isn’t another obligation that replaces it.
If a lender cancels or forgives a debt, a taxpayer must include the canceled amount in their income for tax purposes depending on the circumstances. The tax significance could be serious.
This previously allowed relief only applied to a taxpayers’ acquisition indebtedness of their principal residence which did not include second homes and investment property. The maximum amount was limited to $2 million of mortgage debt forgiveness or $1 million if filing separately.
If have ever utilized this method of debt forgiveness, we advise you to seek out expert tax and legal advice in order to understand this in more detail.