The Mortgage Debt Relief Act of 2007
The Mortgage Debt Relief Act of 2007 allows taxpayers to avoid claiming cancellation of debt income if the income resulted from a mortgage that was secured against their home–meaning that the home was used as collateral–and if the mortgage was used to buy, build or substantially improve the home.
What, exactly, is cancellation of debt income? When your home is foreclosed, all or some of the loan is canceled or forgiven–meaning, you no longer have to pay it back. The Internal Revenue Service (IRS) considers the canceled portion of your loan to be part of your taxable income (commonly referred to as cancellation of debt income — or COD income).
For example, you borrow $200,000 and default on a mortgage loan after paying back $158,000. If you foreclose on your home and the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $42,000. The $42,000 is usually considered COD income and becomes part of your taxable income. But, COD income is not always taxable! A common way to avoid having COD income is through the Mortgage Debt Relief Act of 2007.What Does the Mortgage Debt Relief Act of 2007 Fail to Cover?
- The Act is limited to $2 million (or $1 million for a married couple filing separately);
- It only applies to mortgage debts forgiven between 2007 through 2012; and
- It does not apply in certain circumstances, like (1) if the discharge of the mortgage was not directly related to a decline in your home’s value or your financial condition; (2) if your mortgage cancellation was related to a mortgage on a vacation home or investment property; or (3) if you are insolvent because your debts exceed the fair market value of your assets.
Since the Mortgage Debt Relief Act does not apply in certain circumstances, many homeowners have their debts discharged through bankruptcy as a way to ensure that COD income is NOT taxable.
If you are considering filing bankruptcy in Georgia and are seeking the advice of a qualified attorney, contact the Law Offices of Charles Clapp at 404.585.0040 for a free initial consultation.