On December 18, 2015, President Obama signed a bill that extended the Mortgage Forgiveness Debt Relief Act through December 31, 2016. The extension also retroactively covers mortgage debt cancelled in 2015.
The Mortgage Forgiveness Debt Relief Act (MFDRA) prevents homeowners who went through a short sale from being taxed on the amount of their home mortgage debt that had been forgiven. Normally, debt that has been forgiven by a lender counts as taxable income.
Originally enacted in 2007, the Mortgage Forgiveness Debt Relief Act allows debt forgiveness of up to $2 million to NOT be considered taxable income if:
- The house has been used as the principal place of residence for at least two of the previous five years.
- The debt has been used to buy, build, or make substantial improvements to the home.
Obviously, this is a huge relief to owners of distressed properties who are already facing financial burdens, and it eases many of the concerns they may have had about moving forward with a short sale.
Even if you don’t qualify for the Mortgage Forgiveness Debt Relief Act, you still may be able to avoid paying taxes on forgiven debt by taking advantage of the IRS “insolvency clause”.
It is critical that homeowners considering a short sale meet with a professional to review their options and discuss the potential legal and tax implications.
Washington Property Solutions offers FREE real estate attorney consultations as part of our service.
Call us at 425-381-2233 to schedule a free confidential consultation.