The Mortgage Foreclosure Debt Relief Act

The Mortgage Foreclosure Debt Relief Act (the MFDRA) has provided relief to countless homeowners, or former homeowners, since it was enacted in 2007.  Under the MFDRA, homeowners who received debt relief on their principal residence between 2007 and 2012 do not have to pay income tax on the forgiven debt (normally this debt is taxable).  It doesn’t matter whether the debt is forgiven as a result of foreclosure, short sale, or mortgage modification.  Debt relief under the MFDRA is quite generous — up to $2,000,000 if married filing jointly, or $1,000,000 if single or filing separately.  Forgiven debt is still reported on the tax return, but is exempted from income tax if all qualifications are met.

Unfortunately, the MFDRA is set to expire at the end of this year, on December 31, 2012.  While both Democrats and Republicans are supporting an extension, each party has their own version of what that extension should be.  There is no agreement to extend the MFDRA just yet, and there may not be until the very end of the year, if at all!