Due to expire in 2014, the Mortgage Debt Forgiveness Act of 2007 (MDFA) was extended by recent votes in Congress. Typically, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable; however, the MDFA generally allows the exclusion of income realized as a result of modification of the terms of a mortgage, or foreclosure on your principal residence.
The provision applies to qualifying debts of up to $2 million forgiven in calendar years 2007 through 2014 ($1 million for those married and filing separately). According to the IRS website, there are some exclusions, including discharges “due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.”
According to recent estimates from RealtyTrac:
* There were more than 121,700 short sales through October of last year
* The average US short sale has an estimated mortgage forgiveness of $88,456
* The potential taxes on the average short sale are $22,114
The MDFA had wide support from the National Association of Realtors. “NAR applauds Congressional leaders in both chambers for their effort to pass this legislation before adjournment…Realtors strongly supported the bipartisan Mortgage Forgiveness Tax Relief Act, which was included in the package to prevent underwater borrowers from paying taxes on any mortgage debt forgiven or cancelled by a lender in a workout or after their home was sold for less money than was owed,” NAR President Chris Polychron said.