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THE MORTGAGE
FORGIVENESS DEBT RELIEF ACT OF 2007
On December 20,
2007, President Bush signed legislation, the
Mortgage Forgiveness Debt Relief Act of 2007.
The Act was written in response to some of the
tax issues that have arisen as a result of
problems in the subprime mortgage market. This
legislation was written to help homeowners avoid
foreclosure by protecting them from higher taxes
when they refinance their mortgages. The Act
creates a three-year period of time for
homeowners to refinance their mortgages and pay
no taxes on any debt forgiveness that they
receive. In other words, if a lender forgives a
portion of the mortgage, the amount forgiven
will not be taxed.
The Act should
increase the incentive to borrowers and lenders
to work together to refinance loans. It should
allow homeowners to secure lower mortgage
payments without the threat of paying higher
taxes.
Under the rules
for debt forgiveness, (a) the debt must have
been discharged by the lender in 2007, 2008 or
2009; (b) the amount of debt that can be
excluded is limited to $2 million; (c) the
exclusion can be used only if the loan was taken
out to acquire, build or substantially improve a
principal residence (Forgiveness of debt on
vacation homes, second homes and investment
property does not qualify); (d) Debt forgiven on
a cash-out refinance or home equity loan must be
apportioned between the amounts used for home
acquisition, construction or improvements and
amounts used for other purposes such as tuition,
travel or repayment of other debts. Only the
allowable portion qualifies for the tax break.
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