New Law Gives Tax Relief to People Hit by Foreclosure

Amount forgiven in mortgage refinancing, foreclosure or short sale no longer taxable

December 21, 2007 – Palm Coast, FL – Thursday, President Bush signed the Mortgage Relief Act, sponsored by U.S. Sen. George Voinovich, R-Ohio. The act, which expires in 2009, changes the way forgiven debt resulting from a mortgage foreclosure or refinancing is treated by the IRS.

Before yesterday, the IRS treated any loan forgiveness as income. If a homeowner lost a home through foreclosure and the bank was unable to recoup the entire amount of the loan through a subsequent sale of the property, the shortfall was treated as a forgiven loan. The forgiven amount was subject to income tax, forcing the homeowner further in debt. Likewise, a homeowner who negotiated a short sale of property with their bank’s consent received a tax bill on the forgiven amount. Under the new law, this is no longer true.