Combs Law Group, P.C.
By Christopher A. Combs
January 18th, 2017
Mortgage Debt Forgiveness Law Expired in 2016
Question: Last summer we did a short sale of our home in Peoria. Our lender agreed to the short sale and reduced the amount of the mortgage loan by $100,000 in order to close the sale of our home. Although we never thought of any income tax consequences, our accountant said that we may have income tax liability for this mortgage debt forgiveness of $100,000. Is that possible?
Answer: The general rule is that any debt forgiveness by a lender has income tax liability to the borrower. In light of the numerous foreclosures and short sales during the Great Recession, however, in 2007 Congress passed the Mortgage Forgiveness Tax Relief Act (“Act”). Under this Act the owner of a principal residence, who had lost a home to a foreclosure or by a short sale, had no income tax liability for any debt forgiveness by the lender. This Act has been extended several times, most recently until December 31, 2016. Therefore, you should not have any income tax liability for the $100,000 debt forgiveness by your mortgage lender.
Note: The U.S. Congress adjourned for 2016 without extending the Act. In a recent interview, William E. Brown, the National Association of Realtor’s president, offered some context on the failed extension, including the fact that not all hope is lost for short sellers looking to avoid IRS taxes on their forgiven debt:
“Congress adjourned for the year without taking further action on mortgage debt cancellation relief, which is a disappointment. That said, people should know that because this provision doesn’t expire until the end of 2016, they will still be eligible for mortgage debt cancellation relief when they file their 2016 taxes. What’s no longer covered is any mortgage debt cancelled in 2017 or beyond, which means Congress will need to extend the provision at some point down the road to ensure homeowners are protected into the future. NAR will encourage them to do just that in the year ahead.”