Tax Relief - The 2007 Mortgage Forgiveness Debt Relief Act Explained
One of the new tax laws passed in 2007 included the Mortgage Forgiveness Debt Relief Act, created in response to the high occurrence of mortgage debt and high number of foreclosures in 2007.
The act aimed to help individuals who have no choice but to give up their homes and still have to pay taxable income on the debt that they owe.
While it may not make sense at face value, this is actually quite simple.
For example, if a home must be sold at a price even lower than the debt owed, the mortgage company will accept the lower payment and "forgive" the rest of the debt, considering that the individual has nothing else to give.
However, when a debt is forgiven, a taxable income is automatically acquired by the individual.
This means that the amount of money not paid to the mortgage company, the balance of the debt, is considered money that is currently possessed, even if the money doesn't actually exist.
It is assumed that the individual has the rest of the debt in their possession and the IRS usually taxes that income, even if it is only just paperwork.
While it may seem rather pointless to pay taxes on an income you don't actually have, the IRS believed that you did indeed have this income and continued to rack up the tax returns with penalties and interest, until you realize you're in even more debt than before you sold your house.
A glaring problem for the last few years, this tax liability was resolved with the new law that has extended tax relief to mortgage forgiveness.
The act aimed to help individuals who have no choice but to give up their homes and still have to pay taxable income on the debt that they owe.
While it may not make sense at face value, this is actually quite simple.
For example, if a home must be sold at a price even lower than the debt owed, the mortgage company will accept the lower payment and "forgive" the rest of the debt, considering that the individual has nothing else to give.
However, when a debt is forgiven, a taxable income is automatically acquired by the individual.
This means that the amount of money not paid to the mortgage company, the balance of the debt, is considered money that is currently possessed, even if the money doesn't actually exist.
It is assumed that the individual has the rest of the debt in their possession and the IRS usually taxes that income, even if it is only just paperwork.
While it may seem rather pointless to pay taxes on an income you don't actually have, the IRS believed that you did indeed have this income and continued to rack up the tax returns with penalties and interest, until you realize you're in even more debt than before you sold your house.
A glaring problem for the last few years, this tax liability was resolved with the new law that has extended tax relief to mortgage forgiveness.
