The Mortgage Debt Relief Act has been extended through December 31, 2016. Prior to 2007, when a person lost a home to foreclosure/trustee’s sale, or short sold a home for an amount less than an outstanding mortgage, the deficiency (amount written off by the lender) was treated as taxable income, i.e. debt forgiveness, by the Internal Revenue Service to the homeowner taxpayer.
The Mortgage Debt Relief Act of 2007 ( the “Act”) essentially provided that no income tax would accrue for the debt relief given to a borrower after a foreclosure or a short sale of a mortgage used to purchase a home or to make improvements on a home. The Act expired by its own terms December 31, 2014. Last year the Act was extended through December 31, 2015.
On December 18, 2015, the U.S. Congress passed and the President signed into law the “Protecting Americans from Tax Hikes (PATH) Act of 2015” which extends a host of individual and business tax provisions and makes permanent other items of credit and/or deductions. Included in the PATH legislation was the extension of the Act again, this time until December 31, 2016. Any deficiency as discussed in the preceding paragraphs will not be taxable income to a borrower if the foreclosure or short sale occurs prior to December 31, 2016. Therefore, for both taxable years 2015 and 2016, a borrower losing their home to foreclosure or short selling their home will not recognize income for the debt forgiven on a mortgage used to purchase the home or to make improvements on the home.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Mortgage Debt Relief Act Extended Through December 31, 2016, or any other real estate matters, please feel free to contact Roger C. Decker at 480.461.5343, log on to udallshumway.com, or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.