Prior to the passage of The Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648), any portion of mortgage debt that was forgiven (either through loan modification, short-sale, deed-in-lieu of foreclosure or foreclosure) was treated as taxable income.

The Act will save some homeowners who negotiated a loan modification, are selling as a "short sale" or whose home as been foreclosed upon from paying federal income taxes on the "forgiven" (i.e. unpaid) debt.  There are very specific requirements*:

The mortgage is on the homeowner's primary residence.  The relief does not apply to debt forgiveness on a vacation or investment home.

Forgiveness is for the "acquisition indebtedness" of the primary residence.  Acquisition indebtedness is defined as "the debt used to purchase, construct or rehabilitate the home."

No relief is available for the cash-out portion of the mortgage whether the cash-out takes the form of a refinanced first mortgage, a second mortgage, a home equity line or similar arrangement.  Exception:  if the cash-out was specifically used to improve the home and the homeowner has adequate records to prove it.

Important note for California residents:  This Act relieves these specific homeowners of their federal tax liability but does not relieve homeowners from their California income tax liability.

* Please consult your tax advisor for the complete criteria and guidance as to how it applies to your specific situation.



Wendy Cutrufelli
Alain Pinel Realtors
925.917.1135
Wendy@apr.com