What The Mortgage Forgiveness Debt Relief Act of 2007 means to you.

In December, President Bush signed a bill called the Mortgage Forgiveness Debt Relief Act in an attempt to aleviate some of the distress caused by the mortgage meltdown that is affecting real estate nation wide.

What does it really mean to the homeowner?  Well for the homeowner in trouble and facing foreclosure, there has always been a route that agents pursued called a SHORT SALE.  The short sale often buys the homeowner additional time before foreclosure to sell their property.  It also allows the seller to sell the property more aggressively by marketing it for less than they actually owe.  The bank will often set a price that works for them which is less than owed or sometimes, they approve a short sale and you just submit offers to the bank until they have one that is acceptable.  HOWEVER, the end effect of that action often came back on the homeowner. 

The bank has the ability to issue a tax certificate, a form 1099, to the homeowner who must then count the forgiven amount as INCOME for the year the home was sold.  In other words, if you sold your home for $15,000 less than was owed, you could end up owing taxes as if you had EARNED an additional $15,000 that year.  That might not be that big a deal because the flipside of NOT doing a short sale would have been a foreclosure and not being able to buy a home when your circumstances do change.

The Mortgage Forgiveness Debt Relief Act of 2007 now keeps the IRS from counting that amount that is forgiven as income.  In otherwords, the repercussions for doing a SHORT SALE of your home became virtually none.  It will still affect your credit report but not NEAR what a foreclosure would do.

In addition, by doing a Short Sale and not being 1099'd for the difference, you could come out ahead financially instead of being foreclosed because the mortgage companies still have the right to write off a foreclosure sale in the same manner (in other words, if you allow the home to be forclosed on, you could STILL be responsible for the difference of what the bank sells the home for and what was owed whereas with the Short Sale, you are not)!