What is the Mortgage Debt Relief Act?

Written by Anthony Garcia   // May 9, 2011   // 2 Comments


Homeowners have suffered through one of the biggest housing bubbles and bursts our country has ever seen in its history. At one point there was such a strong sense that one could make a fortune and live the American dream buying, renting, and selling property. Cashing in on the equity in a person’s home was the way to finance and purchase the lifestyle many dreamed to live. At one point I remember someone who bought a home in Tracey California in 2004, now one of the most severely depressed housing markets in the country, and then selling the home one year later and cashing out with $100,000 from the proceeds of the sale. WOW, was how I felt, and what would be the point of going to school to become a lawyer or a doctor if one could become rich making real estate transactions for a living. Of course, thankfully I was aware of the cyclical nature of real estate and was very cautious, perhaps too cautious. However, the country may not have felt the same way.

At the time it seemed as if the entire country was hypnotized or put in a trance with what the housing market promised Americans. From your first time home buyer to the news media, Wall Street, banks, mortgage lenders, mortgage brokers, real estate brokers, appraisers, the Fed Reserve, Alan Greenspan, politicians, and our President were all mesmerized by the promise of the housing bubble. Unfortunately, once the bubble popped the pain of its affect hurt many. One way out of the sting was to short sell a home or have a home foreclosed on. The effects of a foreclosure or a short sale would really hurt a person when it came to tax time. This led politicians to put in place a temporary law to help people in these situations.

Mortgage Debt Relief Act

The Mortgage Debt Relief Act, also known as The Mortgage Forgiveness Debt Relief Act of 2007, is designed to give people tax relief for some mortgage loans forgiven between 2007 and 2012. When a debt is forgiven it typically means that it can be counted as income. In this case when a mortgage loan is forgiven it can have severe tax implications. In other words the amount forgiven can count as a person’s income, and therefore be taxed. The problem with a person in this situation is that they probably won’t have the money to cover the taxes. This could send them spiraling downward towards bankruptcy, if they have yet to file by that point.

The Mortgage Debt Relief Act was created to help people in circumstances where their mortgage was forgiven, by excluding taxes to be paid on the debt forgiven. However, this is not for everybody. One rule is that the limitation is up to $2 million and $1 million if married and filing taxes separately. Wow, really up to $ 2million? I guess this excludes the hedge fund managers and Wall St. fat cats. It’s not like they don’t get sweet tax breaks to begin with. At least the middle class might get a break if they qualify for this forgiveness.

You can read more about the details of this program on the IRS website here.

Will History Repeat Itself?

Will this experience resonate in our minds in the next decade or two? I remember when I was studying to get my real estate license back in 2000 one of the first chapters in the text book discussed the economic cycle of the housing market, the basic point being it has its ups and downs. In other words should we expect another bubble in the next 5-10 years? According to the textbooks this would be a natural course of the housing market. Is our nation going to go back to the lavish spending and cash out lifestyles based on home equity in the future?

I would have to say this depends on whether lending will be as lax as it was in the early and mid 2000s. Do you think we’ll repeat history?



  1. By Tax-y Lady, February 23, 2019

    This is becoming a more common question as I talk to clients about tax liabilities. In short, if you had a home foreclosed, make sure you hire an experienced tax preparer to assist you with the following year’s tax filing. And keep your records to show that tax preparer. There are a lot of quirks about the law, and since it only is in effect for a limited time, not everyone knows what they might think about making sure the foreclosure is excluded from taxable income if you fit the criteria. A good tax preparer should be asking you questions to ensure you get all the exclusions and exemptions you qualify for- and will do research if you have an unusual situation, rather than simply going with what the computer tax preparation software says.

  2. By Latisha, February 23, 2019

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