H.R. 3648 – Public Law 110-142 Signed into Law

Filed in Uncategorized by on January 22, 2008 2 Comments

Mortgage Debt Cancellation Relief – Brief Summary

Congress has responded to problems created by the subprime crisis, rising foreclosures, and high numbers of “short sales.” Until now, when part of a mortgage debt was forgiven, the borrower was required to pay tax on the forgiven amount. Forgiven debt was treated as taxable income. There were a few exceptions, but none applied to debt forgiven on a mortgage for the borrower’s principal residence.

However, under the new provisions, debt forgiveness via “short sale,” foreclosure, or various “workouts” will no longer be treated as taxable income.

Here are a few key features of the law:

  • The relief applies to debts forgiven between January 1, 2007, and December 31, 2009.
  • There is no income limitation.
  • Mortgages must have been secured by the borrower’s prinicpal residence. A borrower cannot have more than one principal residence. Debt must be deemed “acquisition indebtedness;” debt must have been used to buy build, or rehab the primary residence.
  • Limited to $2,000,000 of mortgage debt ($1,000,000 for married persons filing separate returns.
  • Does not apply to cash-outs.
  • Home equity debt may qualify if the debt were used to make home improvements.
  • Refinanced debt qualifies, if it is not more than the amount of the original debt.

This summary is for information only, and should not be construed as tax advice. For more information, consult your accountant or tax expert.

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Comments (2)

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  1. David Bailey says:

    Your comment that there was never an exception for debt forgiveness income liability for the borrowers principal residence I believe to be incorrect. Provided the debt involved was a NON-recourse debt there never has been any debt forgiveness income liability. I refer you to
    Revenue Regulations section 1.1001-2(a) which, in essence, says that in the case of a NON-recourse loan the amount realized is the greater of the fair market value or the loan balance. So, if the property sells for less than the loan balance or if the lender takes less than they are owed, the amount realized and, reported, is the loan balance thereby satisfying the debt. No debt forgiveness, no debt forgiveness income.

  2. James L Hunter says:

    I had to sell my home on a short sale in 2007, it came short of 19,000.00 Will i have to pay tax on that . thank you MR Hunter

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