Mortgage Forgiveness Debt Relief Act of 2007

When the sale of a property does not generate enough proceeds to pay off a mortgage, the lender may forgive part of the debt. This forgiven debt is usually reported to the IRS as income on form 1099. The Mortgage Forgiveness Debt Relief Act of 2007 makes that amount tax free for many people.

Please keep in mind that we are Realtors, not Attorneys or Tax Professionals. Our layman's understanding is that the forgiven debt will be tax free if all of the following are true:

1. You sell your property and the proceeds of the sale are insufficient to pay off the mortgage and the lender forgives the deficiency.
2. The property is your primary residence.
3. You were insolvent prior to the forgiveness of the debt. That is, the total amount of all of your debts exceeded the total amount of all of your liabilities.

Please consult an Attorney or Tax Professional to find out how this new law affects your situation.