Homeowners that went through a short sale or any other type of mortgage forgiveness have been able to avoid taxation on this money for several years. The Mortgage Forgiveness Debt Relief Act helped these homeowners avoid taxation on the money that would otherwise be considered income. This Act expired in 2016 and saw no sign of being extended all the way through 2017.
Luckily, on February 9, 2018, the Act was retroactively extended. The Act now applies to all debt relief pertaining to mortgages throughout the tax year 2017.
Who Benefits from the Mortgage Forgiveness Act?
Just as the Mortgage Forgiveness Act helped distressed homeowners in the past, it does this again. Any homeowner that went through a short sale or had other mortgage debt forgiven can avoid adding this money to their income as long as the mortgage was used to purchase their primary residence.
Before you assume you qualify, make sure you meet the following requirements:
- The property must be your primary residence
- You must have lived in the property for at least 2 of the last 5 years
- The mortgage must have been for purchase purposes; cash-out refinances are not eligible
How Does the Mortgage Forgiveness Debt Relief Act Work?
It might seem strange that the government would consider mortgage forgiveness income. After all, you lost your home, how could you make an income? Here’s how the government looked at it:
Let’s say you took out a $250,000 mortgage. After a few years, you lose your job and are unable to pay your mortgage. You contact your mortgage company and work out a short sale solution. The lender agrees to accept a smaller amount of money while declaring your loan paid in full. Let’s say that they agree to accept $150,000 for the mortgage. In the eyes of the government, you made out with $100,000 in this case since you only paid back $150,000 of the loan.
Luckily, the Mortgage Forgiveness Act prevented this money from becoming taxed. Homeowners with a primary residence that they lost in some type of forgiveness were protected. You could avoid taxes on up to $2 million in ‘income.’
The extension on the debt relief act came just in the knick of time. Up until February of this year, it looked like homeowners that lost their homes and had their mortgage forgiven were going to owe large amounts of taxes on their 2017 taxes. So far the act is retroactive through last year and is set to last through 2019. Congress has not come up with a permanent solution to the problem as of yet, but officials are hopeful that it will come to that soon.