Things You Need to Know about the Mortgage Forgiveness Debt Relief Act

Hi, this is Derik Lewis with Lawyers Realty Group, the premier Southern California short sale team. I wanted to discuss a little about the mortgage forgiveness debt relief act. I’ve heard this confused a few times with being anti-deficiency or a protection against deficiencies. It really has nothing to do with deficiencies or liability from the lender at all. The mortgage forgiveness debt relief act strictly deals with taxes and whether or not you’re going to be taxed if the lender forgives or simply can’t go after you for the deficiency. That’s called cancellation of debt. When you have cancellation of debt, it’s typically taxable, so if you took out a $200,000 loan and then you took out over that 100,000 cash out line of credit, at the end of the day you didn’t have to pay back that $100,000 line of credit because it was forgiven in a short sale or for some reason it was barred from the lender seeking a deficiency after a foreclosure. The IRS basically looks at that and says you got $100,000 and you never had to pay it back. They will want you to pay taxes on it because it looks like someone gifted it to you or paid it to you.

The mortgage forgiveness debt relief act says you might be exempt from paying taxes if it’s qualified principle residence indebtedness that was forgiven. If that $100,000 was actually money used to buy the home, then its qualified principle residence indebtedness and if that is forgiven, you don’t get taxed on it.

It’s very limited, so you need to be careful when someone says don’t worry about your deficiency because of the mortgage forgiveness debt relief act. It has to do with taxes and the taxes are limited. There are other exemptions to cancellation of debt. You can visit our website if you want more detailed information. Briefly, if you’re insolvent, at the time that this cancellation of debt, to the extent you’re insolvent, you can essentially offset the cancellation of debt. It’s a fairly complex analysis and you’re more than welcome to send me an email and ask me questions about it. The other exemption is if you file bankruptcy, and the debt is wiped out in the bankruptcy process, then there is an automatic assumption that you are insolvent and there’s no taxation from that forgiveness of debt.

I’m more than happy to answer any questions, go to the website,, where we’re Southern California’s premiere short sale team, and you can submit questions directly to me and I’m happy to answer them. As always, remember that your lender has a lawyer and you should to.

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