Short Sales Affected by Mortgage Debt

The Mortgage Debt Relief Act of 2007 is set to expire

The Five Star Institute Mortgage Banking and Real Estate Education at The Five Star Institute

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Exterior of the Internal Revenue Service offic...

Exterior of the Internal Revenue Service office in midtown New York. (Photo credit: Wikipedia)

This provision applies to debt forgiven in calendar years 2007 through 2013. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

Unless Congress votes to extend The Mortgage Debt Relief Act of 2007 for another year, it will expire at midnight on December 31, 2013, and the swell folks at the IRS will once again tax forgiven debt at the same rate as earned income!

And if this occurs, property owners in foreclosure will have no monetary incentive to sell their property via a short sale transaction, which will bring short payoff sale transactions to a screeching halt!

Read IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, for further information on the Mortgage Debt Relief Act of 2007.

However it is not all doom and gloom. Don’t forget about the “insolvency” exemption regarding paying taxes on forgiven debt. Most “Short Pay” Sellers of primary residence who are truly financially strapped (which is why they are selling) have a good chance at qualifying.

You need to discuss this with your tax account to make sure you get any relief you are entitled to during the short sale process.

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Debt (Photo credit: LendingMemo)

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About the author

Sherry Fields Written by Sherry Fields: Working in real estate for over 12 years, Sherry Fields is certified in Foreclosures, Short Sales and Negotiations along with many support computer platforms on the web. She has been helping her clients buy & sell homes by building relationships so that they can buy and sell with confidence. You can find her at Twitter, LinkedIn, ActiveRain Facebook and

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