I’m not a CPA or tax official, but this looks like it may help the homeowner when a short sale has occured.
"On December 20, 2007 the “Mortgage Forgiveness Debt Relief Act of 2007” became Public Law No: 110-142. The law is retroactive to January 1, 2007 and will extend until December 31, 2009. The passing of this bill creates a three-year window for homeowners to either refinance their mortgage or sell, and pay no taxes on any debt forgiveness that they receive.
Here is an excerpt of the law: “Mortgage Forgiveness Debt Relief Act of 2007 - Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtness. Reduces the basis of a principal residence by the amount of discharged indebtness excluded from gross income. Disallows an exclusion for a discharge of indebtness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Sets forth rules for determining the allowable amount of the exclusion for taxpayers with non-qualifying indebtedness and taxpayers who are insolvent. Extends through 2010 the tax deduction for mortgage insurance premiums.”
Only applies to the credit and income challenged homeowners for whom the income taxes on the forgiven debt would impose a financial hardship. Basically, the “C” credit homeowner who purchased with a sub-prime loan and who can barely afford the house payments before the loan reset.
Where did you get that information from? Here is the nutshell from the NAR site (see the first General Provision):
Mortgage Debt Cancellation Relief - H.R. 3648 - Public Law 110-142 General Information and Provisions
Individuals who are relieved of their obligation to pay some portion of a mortgage debt on a principal residence between January 1, 2007 and December 31, 2009 will not be required to pay income tax on any amount that is forgiven.
General Provisions of Public Law 110-142:
No income limitation: All borrowers receive the relief, no matter what their income.
Dollar limitation: No more than $2 million of mortgage debt is eligible for the exclusion ($1 million of debt for a married filing separately return).
Relief applies only to an individual’s principal residence.
The forgiven mortgage debt must have been secured by that residence.
No relief is available for cash-outs, whether the cash-out takes the form of a refinanced first mortgage, a second mortgage, home equity line of credit or similar arrangement.
Eligible debt is what is called “acquisition indebtedness.” This is debt used to acquire, construct or rehabilitate a residence.
Refinanced debt qualifies, so long as the debt does not exceed the original amount of the debt. (Same rule as Mortgage Interest Deduction)
Home equity debt (or second mortgages) qualifies if the funds were used to improve the home. (Borrower must have adequate records, as under current law.)
See cash-outs, above. No amount of a cash out may be treated as acquisition debt.