The material contained in this article is informational and for our valued clients only. A tax or legal professional should be consulted before making decisions related to this Act.

Yes, its tax time again and if you have lost your home to foreclosure, or if you have participated in a short sale, then we suggest that you consult with a tax or legal professional. These professionals can advise you about how these events may be characterized by the federal government when it comes to the income taxes you may owe in light of the Mortgage Forgiveness Debt Relief Act of 2007.

The good news is that the Mortgage Forgiveness Debt Relief Act of 2007 has been extended to apply to homeowners whose mortgage debt has been totally or partially forgiven up through tax year 2012!

In the past, if a homeowner had their mortgage debt partially or totally forgiven, this amount was characterized as taxable income to the taxpayer. Under the Mortgage Forgiveness Debt Relief Act, taxpayers can now exclude the amount forgiven from their taxable income provided, several requirements are met. First, the residence in question has to be your primary residence, not a second home or a vacation home. Second, the Debt Relief Act only applies to properties where debt was forgiven during calendar years 2007 through 2012. Third, this Act only applies to forgiven debt under 2 million dollars for married taxpayers, filing jointly, and 1 million dollars for single taxpayers. There may be other requirements that you must meet in order to qualify.

As an aside, debt forgiven which is discharged in a bankruptcy is not considered taxable income.

If you are anticipating an upcoming event which involves mortgage debt forgiveness or a short sale, then timing is everything. Have a legal or tax professional help you review the law, so that you will know how to qualify for this debt relief before the Act expires in 2012. If you are going to have to experience this type of traumatic event, you should at least be aware of your rights and act in a timely manner so that you qualify for the tax break.

A word of caution. In order to attempt to qualify for this Act, you must timely file a Form 982 with your tax return. If you are using tax software to complete your tax return like Quicken or Turbo Tax, make sure that this form is included in your software program, or else your return will contain errors, and you may not be able to claim the relief made available to taxpayers under the extended Debt Relief Act. Your best option is to have a tax professional prepare your tax return to ensure that you receive the tax relief you deserve!