Mortgage Debt Relief Act – 2014
The general treatment of debt forgiveness outside of bankruptcy is that it is income subject to income tax. I.E., when a debtor owes $10,000 of debt and is forgiven $5,000, then the debtor must report income earned of $5,000 on their income tax return for the taxable year. There are exceptions to the general notion that cancellation of debt income is includable on income tax returns.
Until recently, the major exception that applied to consumers was the Mortgage Debt Relief Act. Under the Act, a homeowner that was receiving cancellation of indebtedness with respect to a first mortgage could exclude this debt relief on their income tax return. The exclusion could also apply to second and third mortgages if they were entered into for consumer reasons (i.e., to purchase or improve the home). Note, the Mortgage Debt Relief Act never applied to investment properties.
Unfortunately, the Mortgage Debt Relief Act expired midnight on December 31, 2013.
There is talk about Congress possibly extending the MDRA retroactively for 2014, but unless legislation actually passes, homeowners should be cognizant that there is a risk that a short sale or deed in lieu will lead to a catastrophic income tax event. Any debtors considering short sale should definitely seek advice from a CPA and attorney before closing on a short sale or deed in lieu of foreclosure.
Cain & Herren, ALC, will continue to follow developments relating to the Mortgage Debt Relief Act.
If you or a family member or friend are having trouble making mortgage payments and want to consider your options, schedule a free consultation with one of our attorneys. We can be easily reached at 242-9350 or via email at firstname.lastname@example.org.