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MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007 |
An E-News Bulletin
Compliments of RGS Title, LLC – 01/02/2008
MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007
In an effort to bring some relief to those who have to pay tax on the “phantom income” of forgiven debt, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007 enacted by the 110th Congress on December 20, 2007.
Subject to certain exemptions, the forgiveness of debt is taxable income, so that the amount that an owner did not have to pay on a mortgage debt as the result of a short sale or foreclosure would be considered taxable. The Act adds a new exemption for “qualified principal residence indebtedness” which is discharged before January 1, 2010. It has limited effect, as it applies only to “qualified principal residence indebtedness”, but may allow some of your clients to avoid the added “poke in the eye” of paying taxes on money not received, after having to bail out of a property through a short sale or foreclosure. (“Qualified principal residence indebtedness” is essentially the same as indebtedness which would qualify for the mortgage interest deduction.)
The Act applies to discharges of debt which occur on or after January 1, 2007, so you may want to contact your clients of the past year to be sure they are aware of this new law and suggest they consult with a tax adviser to see if they could benefit.
Two other sections of the Act affect the real estate world:
- First, the prior law that allows PMI to be treated as deductible interest has
been extended for 3 additional years to December 31, 2010.
- Second, an unmarried surviving spouse has an extended period of time to enjoy the full $500,000 capital gains exclusion on the sale of principal residence, that the married couple would have had, but for the death of his or her spouse. The Act allows the benefit of the full $500,000 exclusion to the surviving spouse, if the sale of the principal residence is within 2 years of the date of the spouse’s death, and would have otherwise qualified immediately before the death. This section applies only to sales after December 31, 2007.
The information in these materials was prepared by the law firm of Shreves Schudel Devol Saunders Jackson Clarke and Parello, PLLC in its capacity as general counsel to RGS TITLE LLC. It is not intended nor should it be relied upon as legal advice, without consulting independent counsel for specific advice on your particular circumstances.