The Mortgage Debt Relief Act of 2007 allows mortgage borrowers to avoid paying federal taxes on debt that is forgiven as a result of a short sale, foreclosure, or loan modification.
To avoid forgiven debt being considered taxable income, the debt must be tied to a primary residence and must be used to buy, construct, or substantially improve a primary residence.
The act will expire at the end of 2012 unless extended by Congress.
There is a proposal to extend the act to January 1, 2015, but it will be up to Congress to approve the extension.
Not surprisingly, we can expect Congress to argue over “fairness”, who benefits, why it should/should not be done, and who will pay for it.
Source: DSNews.com article
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