Most consumers do not realize that when they enter into a debt forgiveness program, the amount of their debt that was erased is now considered taxable income. Normally, borrowers would be required to pay taxes on the forgiven mortgage debt amount. At the end of the year these individuals must claim this amount on their taxes and pay the appropriate taxes. This can lead to financial disaster for those not prepared to pay the additional taxes.
However, until Dec 2012, the Mortgage Forgiveness Debt Relief Act of 2007 provides any home owner that has had a portion of their mortgage principal forgiven protection from this burden.
This includes balances forgiven through a short sale, or foreclosure.
Consumers should also be aware that the debt forgiveness may not occur at the time of the sale or foreclosure. If the lender decides not to forgive the debt until after the sale, that will be when the forgiveness takes place, not at the time of the sale.
This is why it is so important to sell your home now. Short sales can take months to complete and foreclosures are backlogged. The debt forgiveness must take place before expiration to ensure consumers receive full exemption from the associated taxes. Any amount forgiven outside the period covered by the 2007 Act may be taxable as regular income costing consumers tens of thousands of dollars.
It is very important that borrowers consult with a professional tax advisor, financial planner, and/or legal advisor. This will help them properly prepare for their taxes in the following year.
The IRS offers valuable information about the Mortgage Forgiveness Debt Relief Act 2007
To avoid a large tax hit and to protect your family through the Debt Relief Act of 2007, Get Your Home Sold Before It Expires!
The protection runs out 2012. Don’t Wait!
Bob Elliot — REALTOR®
26 Years Local Industry Experience and Strong Lender Expertise!
Important notice: I am a REALTOR® providing short sale service, not loan modification service, at no cost to you.
RES Realty is not associated with the government, and our service is not approved by the government or your lender.
Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you
could lose your home and damage your credit rating. This is for informational purposes only. Information is not intended as tax or legal advice.