Mortgage Relief Act Becomes Law

How scary is it to owe taxes on the sale of your home after you have already fallen behind on your payments? I would say pretty scary and thankfully the federal government agreed late last year to pass H.R. 3648: Mortgage Forgiveness Debt Relief Act of 2007 which changes the IRS tax code on debt relief for primary residences.

So what does this all mean? Well prior to the change in law, which became effective when President Bush signed it into law effective December 20th 2007 home owners who sold their homes on a short sale would receive a 1099 from the bank for the loss and it would be treated as income. This obviously created a problem because taxes would be owed on the debt relief but borrowers didn't have funds to make their mortgage payments and didn't have money for the taxes.

So now borrowers can work with a bank on a short sale without the fear of being hit with a 1099 and owing taxes for their principle residence. The tax code now excludes debt relief from a primary residence from being calculated as gross income. This law is in effect until 2010 and was created to address the current need of homeowners to sell their home without having equity.

More information on this law can be found at: http://www.govtrack.us/congress/bill.xpd?tab=summary&bill=h110-3648 which has a complete description of the bill and when it was signed into law.