On December 20, 2007, President George Bush signed the Mortgage Forgiveness Debt Relief Act of 2007. For homeowners in financial trouble, this is good news.
Under the system before this act was signed, homeowers that sold their homes for less than what was owed (a 'short sale'), or who had debt forgiven due to a foreclosure, deed in lieu or other loan modification arrangement, were taxed on that forgiven amount, often called 'phantom income'. Internal Revenue Service (IRS) guidelines considered that amount a gift, and therefore taxable income. Talk about kicking you when you're down!
The act is retroactive to January 1, 2007 and runs through December 31, 2009. It's capped at a $2 million figure for tax relief and is limited to situations where debt is forgiven because of a decrease in home value or financial hardship of the borrower. It also excludes second homes from tax relief, so it works only with your principal residence.
It also calls for the extension of mortgage insurance premium deductions on your tax return through 2010.
The bill is considered responsible and fair because it will be paid for by increasing penalties for S corporations and partnerships that fail to file taxes.
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