Summary of the Mortgage Forgiveness Debt Relief Act of 2007 and its exclusions.

In 2007 the Federal Government passed the Mortgage Forgiveness and Debt Relief Act of 2007, providing for relief to many whose homes have been foreclosed and mortgage debts cancelled for the period between 2007-2010.

Generally a person who has received the benefit of cancelled debt must pay income tax on the presumed income received from the cancelled debt. A creditor will issue a 1099 to a debtor and that debtor must report the amount as income on their tax returns.  Additionally, if real property is seized by the creditor in connection with a secured debt and "sold" (i.e. foreclosure) you may have to report gains or losses on the sale of the real property. Thus the Federal Tax Law will generally consider cancelled debt are reportable income, unless an exception applies.  The most common cancelled debt categories include:

• Credit Cards (Non-Business)
• Personal Vehicle Repossession
• Principal Residence Foreclosure or Abandonment
• Principal Residence Loan Modification

Business Deductible Expenses/Debt May Be Excluded.  Generally business (whether sole proprietorships or entities) will have the benefit of deducting expenses and therefore debt incurred as a result of a business expense that would otherwise be deductible under the law, would not require reporting such cancelled debt as income.  Careful reading and understanding of the applicability of exceptions is necessary to ensure accuracy in your reporting. Therefore, you are always adivsed to seek professional tax help.

Bankruptcy/Insolvency May Permit Exclusion. The filing of bankruptcy may also affect how you report income for cancelled debts.  If you file bankruptcy under Chapter 7 or 13, different rules will apply when preparing your tax returns.  Generally, the excess of your debt to your assets will affect the amount you report on your return, and therefore special attention should be placed on how much debt is being cancelled and the value of the assets you held prior to filing for bankruptcy.

Principal Residence Exclusion (Foreclosures/Abandonment).  Under the principal residence exclusion debts incurred as a result of a foreclosed home for less than $2,000,000 may qualify for foregiveness.  The Act provides relief so long as the debt is foregiven as a result of a foreclosure and repossession occurs and there is no gain from the sale or disposition of the property; the exclusion however only applies for mortgages that are less than $2,000,000.00 ($1,000,000.00 married filing separately).

Before you decide to withold payment or file for bankruptcy, speak to an professional advisor regarding your options and the consequences of each option, from a financial and tax perspective.  The exclusions and descriptions of the possible benefits of the Act may be affected by California's tax laws.

For more information regarding the Act and examples of tax debt relief you may consult the Internal Revenue Service at http://www.irs.gov or click on the link for information on Cancellation and Debt Foregiveness and Publication 4681 - Cancelled Debts, Foreclosures, Repossessions and Abandonments.