President Bush signs Mortgage Forgiveness Debt Relief Act of 2007
On Dec. 20, 2007 President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007. The goal of the legislation is to help Americans avoid foreclosure by protecting families from higher taxes when they refinance their home mortgages.
Under current law, if the value of your house declines, and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as income that can be taxed. The Act creates a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness they receive.
In his remarks at the signing, President Bush said, “The bill I sign today will help this effort by ensuring that refinancing a mortgage does not result in a higher tax bill. Under current law, if the value of your house declines and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as money that can be taxed. And of course, this makes a difficult situation even worse. When you're worried about making your payments, higher taxes are the last thing you need to worry about. So this bill will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. And it's a really good piece of legislation. The provision will increase the incentive for borrowers and lenders to work together to refinance loans -- and it will allow American families to secure lower mortgage payments without facing higher taxes.”
Foreclosure investors need to understand this legislation and what it will—and won’t—do for homeowners facing foreclosure. It will help homeowners who negotiate with their lenders to refinance using tactics similar to a short sale by eliminating income tax on the amount by which they reduced the loan.
Here’s an example: Let’s say Joe bought his house for $350,000. He secured 100 percent financing with a three-year ARM. Now his mortgage is adjusting, his payments are going up, and the value of his house has dropped to $300,000 but he still owes $330,000 on it. He can’t afford the new payments and he can’t sell the house for what he owes on it. Instead of walking away from the house, he goes to his lender and asks the lender to refinance the house for $300,000 under terms that would allow him to afford the payments and forgive $30,000. The lender may agree to avoid the expense of foreclosing. But prior to this new legislation, if the lender did agree, Joe would have to report the amount of forgiven debt on his tax return and the IRS would consider it as income for tax purposes. Now, that won’t happen.
There are plenty of other foreclosure circumstances that this legislation won’t help. If you are using foreclosure investing strategies, make sure you—and the homeowners you are working with—understand this legislation completely and don’t count on it to do something it wasn’t designed to do.
Jackie
