Mortgage Forgiveness Debt Relief Act of 2007 Will Likely Be Extended

We expect Congress to extend the Mortgage Forgiveness Debt Relief Act of 2007, which played a major role in this year’s rise in short sales and principal reduction loan modifications.

The Act, which expires on December 31, has been a huge help to people whose mortgage debts have been forgiven or reduced over the past five years. Here’s why:

According to the IRS, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable income.  The Mortgage Forgiveness Debt Relief Act generally allows taxpayers to exempt mortgage debt forgiven by a lender in a loan modification, short sale or foreclosure. The provision applies to debt forgiven from 2007 through 2012.  Up to $2 million in forgiven debt is eligible for the exclusion ($1 million if married and filing separately).

If the Act is not extended, next year borrowers will have to claim debt reduction or mortgage relief as income on their 2014 federal tax returns. For some people, the tax liability could amount to tens of thousands of dollars. For example, a $200,000 reduction in principal could produce a tax bill of $50,000 or more.  According to an article in the New York Times, the Act saved borrowers more than $1 billion in taxes in 2011.

The Obama administration, the Federal Reserve and members of Congress on both sides of the aisle recognize that a recovery in the housing market is one of the quickest ways to boost economic growth.  They also know the Mortgage Relief Act has helped thousands of homeowners avoid foreclosure.

Given the popularity of the Mortgage Debt Relief Act and the potential for serious political fallout if the act is not extended, we doubt politicians will let the law expire. We could be wrong, of course, but politicians typically want to get re-elected, and allowing the Mortgage Forgiveness Debt Relief Act to expire seems like political suicide to us. Our concern, however, is the Act will get lost amidst the political wrangling over the “fiscal cliff” and overlooked.  We certainly hope not.

So what do you think?

UPDATE – The Mortgage Forgiveness Debt Relief Act was extended as part of the fiscal cliff deal reached last night! Actually a little closer to the wire than we expected, but no surprise, there was strong bipartisan support for this, they just needed a vehicle by which to get it done.


40 thoughts on “Mortgage Forgiveness Debt Relief Act Will Likely Be Extended

  1. Your article title suggests that the MFDRA “will likely be extended,” yet the article doesn’t provide any particular information to back up that claim. Why do you think it will?

    If you think it will based on the (assumption) that it’s only logical that they will, I’d say that’s a bad assumption. Congress has been dysfunctional for… how long now? The fact is, several different bills have been introduced in both houses, but NONE OF THEM have come out of committee yet. Which essentially means no meaningful action has occurred yet. And given the current stonewalling approach that both Republican Congress AND President Obama are taking with each other on this and all the other issues tied into the ‘fiscal cliff’ we’re all facing, I don’t see how this particular bill will complete all the other necessary progress to pass prior to 12/31/2012.

    I’m not a legislative analyst, but I really don’t think this crisis will be averted by the end of the year. Which is stupid, because logic suggests it should and will get passed. I’m telling my clients to hope for the best and prepare for the worst. But I think it’s irresponsible to put out the idea that it “likely will be extended.”

    The best I’m hoping for at this point is that they might retroactively fix it. But that certainly doesn’t help anyone today.

    • We don’t disagree that congress is dysfunctional right now, especially when it comes to dealing with the “fiscal cliff”. But I remain confident we will see some housekeeping items taken care of before year end, including extension of the Mortgage Forgiveness Debt Relief Act. We will know shortly, and clearly anyone in escrow on a short sale should do everything they can to get it closed this year just in case.

      • Congress has been disfunctional. The problem with this country that everyone seems to be missing is this.
        This counrty has been going down hill for the past 30 years. Have you figured it out yet? It’s the Senate and Congress, the majority have been in office for the past 30 years. The same people who claim they are trying to protect us from creditors made the same laws that allowed them to take advantage of us. The Sub-prime lending industry was created by these same people when they deregulated the industry. And people keep voting them into office. Don’t forget these same politicians will receive $250,000 a year when they retire. How much are you going to get from Social Security?

      • Hi Folks,
        I am too old to believe in the tooth fairy so I think we should advise short sale candidates that there are insolvency provisions in the IRS Code so they won’t be taxed. Most people short selling probably qualify as their liabilities exceed their assets.
        In addition, California law protects them from a deficiency judgment. Keep in mind that they should get advice from an accounting professional as a CPA. Real estate agents are forbidden from giving tax advice.

        • I also believe insolvency is the solution. Many people are not aware of this. If your liabilities exceed your assets you may deduct that difference from your 1099. Since we built a house to move into and couldn’t sell our other house we got stuck with two houses. One looks like an investment home so we need the insolvency rule. I hope it works.

  2. Pingback: Securitization Audit News Mortgage Forgiveness Debt Relief Act Will Likely Be Extended … | Securitization Audit News

  3. I called a Congressman from our area several weeks ago. His aide told me the act was a frequent topic in emails and that it looked like it would be extended along with several other bills for a year to give them time to work on the bills in more detail after the new year. I called again last week and now the buzz is, “it’s hard getting stuff done, what with the fiscal cliff and all.” Translation: they are using the phrase “fiscal cliff” as an excuse to do nothing. I am not optimistic about them extending it this year (although it would be SO easy, they could have done it already).
    However, I am optimistic they’ll finally figure out they can’t play around any longer and finally get it passed early next year, and make it retroactive back so no one will be effected.

  4. Not sure if you guys will know the answer to this but my wife and I are in the middle of a short sale and it doesn’t appear that it’ll be finished by Dec 31st 2012. That being said, we live in AZ which is considered a Non-recourse State and we’re wondering if that is what will protect us from not having to pay taxes on the difference or if it has nothing to do with it at all? hope that’s not a dumb question, and thanks.

    • Mark:

      Non- recourse only deals with foreclosure. It doesn’t pertain to doing a short sale or receiving a 1099 after completing a short sale. Non-recourse means, if the bank forecloses on your home, they have no further recourse against you to get back the difference- i.e.- they can’t come after you for the remainder of the loss. Their ONLY option is to foreclose on you. This is if the home is your primary residence and the loan is a purchase money loan (you got the loan in order to purchase the home). Confirm with your tax or legal expert for tax and legal questions, as I am a real estate agent (licensed only in California) licensed to help people buy and sell real estate in CA. Good luck with your short sale!

  5. So, if I live in Arizona and I want to avoid paying taxes to the IRS, is it better to do a foreclosure instead of a short sale?

  6. This area of tax law is complicated. There are so many factors that affect people differently and consumers need qualified advice. I speak with people on a daily basis who have been misguided with regard to tax liability. The IRS says the Mortgage Debt Forgiveness Act is being “abused and misused”. The MDFA is not a blank check and does not cover everyone. While I agree that ultimately Congress will get it extended, there are still several other tax provisions, including insolvency as someone mentioned earlier, that allow a home owner to exclude or reduce tax liability as a result of short sale, foreclosure, deed in-lieu or a loan modification with principal forgiveness. This is not the year for the online tax software or an accountant who doesn’t understand the complexities of this area, especially if you are using the insolvency provision. Realtors should be very cautious when discussing these issues and to reduce liability, be sure your client gets the qualified advice they deserve.

  7. @Jerry. Foreclosure does not change the fact that the bank is losing money and the IRS considers this income. How you exclude or reduce the income tax liability is the question. From a tax perspective, we have never had a client who would benefit from foreclosure. A short sale statistically yields more money, which in turn reduces the 1099 that the banks will issue you. There are many other reasons why a short sale is better than foreclosure as well. I would check with a local RE professional or attorney to discuss possible legal liability post short sale. In CA we have two very important Senate Bills that revised our civil code 580 e with regard to deficiency balances. SB 931 & 458 protect a homeowner from the deficient balance post short sale. You must understand the conceptual difference between possible legal liability and possible tax liability. Two very separate issues.

  8. Raymond Craig Tarry says:

    I live in California and I’m most likely headed for foreclosure on my underwater mortgage (I refinanced more than once, all “pick a payment loans”, back before the housing crash).
    Even if the Mortgage Forgiveness Debt Relief Act is extended, don’t you have to deal with state tax on cancelled debt or is that somehow included in the Relief Act?
    I thought someone here might know – Craig

    • Craig,

      CA State tax is taken care of with Senate Bill 458 and protects you from any deficiencies. Confirm with a tax expert and google the senate bill for the text. Or I can send it to you. Please feel free to call me- I do short sales for the entire state of CA and would love to help. 661-706-6922. 
      -Mike Towers
      CA DRE# 01762322

    • Craig,
      You are correct that the MFDRA is a Federal law that deals with Federal taxes (IRS). State taxes are an entirely separate issue. Fortunately for California residents, the CA state legislature created a CA state law that, with very little exception, causes the CA Franchise Tax Board (FTB) to view the issue the same way as the Federal MFDRA law. For the next couple weeks, anyway. See

      That I’m aware of, I believe California’s law also expires 12/31/2012, meaning you will also be exposed to tax liability at the State level as well, come 2013.

      1-Mike’s comment below relates to deficiencies, which relates to continued liability to THE LENDER after the short sale is completed, which is unrelated to your question about tax liability owed to the government.

      2-SHORT SALE IS STILL BETTER FOR YOU, COME 2013. Many homeowners don’t realize this, but there is also a cancellation of debt in a foreclosure. So allowing the lender to take it will still cause a nasty tax liability. Even if there is a tax consequence for doing a short sale it will still be less than in foreclosure, because the loss to the lender will be less, because you can ensure it sells for full market value because as the owner, you’ll still be in control of the sale price of the home. And because the lender will not have incurred as much delinquency and spent all the money involved in completing the forecloaure process. ALL the money the lender spends to maintain and repair a property, conduct the foreclosure, the back payments, costs of selling the property as a bank-owned foreclosure–ALL those lender incurred costs are part of the lender’s loss and therefore cancellation of debt that the former homeowner ends up having to claim as income and pay tax on. So again, regardless of this law being extended or not, short sale is stil a better outcome for homeowners than to just let the bank foreclose.

      Click on my name, which takes you to my website, if you’d like to continue that discussion privately.

  9. I’ve seen what I consider an abuse. Man owns a business, very successful, has business lend him $800K+ to purchase a home. Has now done 2 modifications under relief act to reduce principle to $500K and interest to 3.5%. Don’t think he had a lot of trouble getting the modification, $300K in his pocket tax free!!!

  10. I’m in California, in the middle of a short sale on my home. A short sale that should have closed a month ago, but did not close because the negotiator that Fannie May and Bank of America uses “dropped the ball” and let my file sit and collect dust. Now the sale has no chance of closing before the 31st. I’m a single mom of two, Up until two months ago I made every mortgage payment on time… 15 years of being responsible, not ripping anyone off or expecting something for nothing… I’ve never once collected welfare or food stamps, etc., but now, times are different. My ex-husband decided 4 years ago to stop paying the $350.00 per month child support, fuel and utilities increased, medical insurance increased while benefits decreased, I had increasing college tuition costs to cover for my son… It’s as if every dream I ever had for myself and my children has been squashed. I thought of all the things to let go of, relief could only come from getting out from under my underwater home. Now, because the ball was dropped… My back is against the wall. I’m broke. Financially, emotionally… I really hope the act is extended, though, whether it happens or not, I have to continue with the short sale… I can’t make the mortgage payments and its not fair to anyone (the American tax payers [myself included], the financial/banking institutions, as well as all our children) to opt for foreclosure when a short sale would reduce total overall loss. I started this process with more than enough time to meet the expiration of the debt relief act, it was Fanny Mae and their negotiation company that drug their feet and didn’t process my file. What recourse do I have? Ugh! I hate being me!!

  11. the Family and Business Tax Cut Certainty Act of 2012, was initially approved by a Senate committee 9-5. This bill approves the extension of the Mortgage Forgiveness Debt Relief Act for one more year (end of 2013) and extends other tax break programs for individuals and small businesses. Of course, this has been put on the back burner pending resolutions of issues surrounding the fiscal cliff. Extension of the Mortgage Forgiveness Debt Relief Act for another 12months would make sense however, since the approval of the $25B program to provide principal reductions from the 5 big mortgage lenders back in April/May 2012.

    • Thanks for that ray of hope. I’m in a similar situation as Misty D.
      Could you please provide me (us) with a printed source of reference? Many thanks.

  12. I am in the middle of a short sale as well as the others. I was given a closing date of Dec 11,2012. I rushed and found a rental, paid for a mover plus all of the deposits required for renting a home. The closing never occurred, but I was reassured the closing will happen before Dec 31st. Meanwhile, I had to payy full Dec mortgage on a house I am not living in plus the Dec mortgage on my rental. Not to mention utilities etc… I just got word that the closing will not occur before Dec 31st. So, on top of the expense of 2 homes currently I’m enduring, I may be hit with the tax implications if the Debt Relief act is not extended. Should I still go through with the short sale? Is there any recourse for having to pay for both homes since I was given an original closing date which forced me to leave my home and find a rental? What kind of attorney should I consult? Please help.

  13. So, here we are midway through December 31, 2012. As mentioned in my original (first) comment; while I wish I was wrong here, this law will be expiring at the end of the day. There has been no extension. Hopefully Obama and Congress will figure something out after the fact and make it retroactive, but there’s no evidence of that yet. Speculation, sure. Evidence? None, yet.

    As I mentioned in my original comment, this headline and its claim never should have been made. As we’re learning now, it was unfounded.

  14. I think it’s time people start being held accountable for their actions. There are a lot of people who got into loans they knew they could not afford, they lied about their income. These same people helped drive housing prices to an unrealistic price. Everyone has know the Debt Relief was going to expire the end of 2012. Many of these same people have been living in their homes for free for years. What did they do with all that money? You had 3 years to short sale, foreclose, do a loan mod, times up.

    • Wow… Thanks a lot Ed.
      While I have no doubt that what you said about folks taking advantage of free rent is true, there are probably 10 times that amount of folks that don’t fall into that category that really need this extension… You sound angry and bitter and I totally understand the reasoning behind it, how do you think the rest of us feel about it!!? I’m 46 years old, employed since I was able to get a work permit at age 14. I don’t qualify for ANY of the programs that I have been paying into for the last 32 years…
      How about you choose a different subject to vent your frustration.. Like maybe, welfare abuse, section 8 housing abuse, medi-cal abuse, supplimental social security abuse or those folks on unemployment that actually TURN DOWN employment because it pays the same if not better to stay unemployed!! Those are the issues that your rants and spent energy might actually be able to make a difference and could change things. It sucks that there are people out there that take advantage of our system… But there are… Should I pay the price for that? Should I suffer the consequence of their actions? If so, then I guess from this point forward we should just cut all services and programs such as the ones I mentioned above because “times-up” and everyone on welfare, section 8, unemployment, medi-cal and SSI should find another way to survive as well. Right?!! Yah, that ain’t gonna happen. So I guess I’ll lose my home or be taxed to my destruction yet still continue to pay into the system to fund the programs that so many are abusing that I’m not allowed to participate in. Think about that, maybe – you could use this medium to vent your anger and it might could make a difference, reduce taxes so we bring home a little more in our paychecks, so homeowners can maybe make their payments or pay their tax penalties…
      Oh, and by the way… I hope you have a happy new year.

  15. I agree Misty, I’ve been in the same business for 18 years, and company for over 5. We were forced into a short sale because my wife lost her job and things got rough. To imply that I should of “timed” the hardship in my life is insane. I have 4 kids and have busted my ass and paid into all these programs, why can’t we get a hand out like the loser that are on Government assisted programs that don’t want to work and that lie about where they live or who they live with just to take advantage of them. If anyone thinks that losing the first house my wife and I built after 4 years isn’t hard enough, then find the article that’s titled “how to kick someone when they’re down”. The Title of this article is, “Mortgage Forgiveness Debt Relief Act Will Likely Be Extended”! Only people who are interested/effected by this should be commenting. Just Sayin

  16. Jon – No worries…
    Looks like they extended the act for another year.
    Lucky us, I guess we only get to lose our homes.
    Ed, That was sarcasism.

  17. Awesome. Well now we need to hope the short sale goes through by the end of this year, LOL. Bank keeps losing our bank statements. :-)

    • Absolutely agreed. I’m tired of 12 month band-aid extensions. Don’t get me wrong, I’m grateful something happened, but we won’t be done with short sales as a force in the marketplace in 12 months. Should have been extended to end of 2014 or 2015, if not made permanent. While it’s better than its expiration, all this and the entire bill does is extend the anxiety in the marketplace and lack of stability for our economy.

  18. WhyShortSale says:

    You spoke recently in San Diego – always good to hear you speak. Anyways, since the Homeowners Forgiveness Act expired at the end of last year (2013), I am wondering what incentives exist now for homeowners to agree to do a short sale? Sure, home loans in CA are non-recourse which means the lender’s only recourse is to foreclose; however, that doesn’t help homeowners with the tax consequences of a short sale because they will still get hit with a nasty tax bill in relations to the forgiven debt (i.e. a 1099-C). Can you share if you think this Forgiveness Act will be extended through 2014 (we are already into April of 2014 and nothing has happened with this yet)? If not, then why would a homeowner agree to do this anymore? Why wouldn’t the homeowner just squat on the property for as long as it takes until the lender forecloses on them? And thus, as an investor, I don’t know what the point (not to mention the moral battle) of pursuing these types of homeowners knowing they will get hit with tax consequences.

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