Mortgage Forgiveness Debt Relief Act of 2007

President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007 on December 20, 2007. The bill actually amends the Internal Revenue Code of 1986 in several ways and covers the issue of forgiven mortgage debt.

Previously, a homeowner who lost their property to foreclosure or sold their property for less than the mortgage amount could be taxed on the amount of the mortgage that was forgiven by the lender. A 1099-C statement of canceled debt was issued by the mortgage company to the IRS for the amount of loss. The IRS then considered that canceled debt to be income for the home seller. The seller may already be in dire circumstances from a loss of job, illness, accident, family disaster, etc., in addition to losing their home. The additional hit of having to pay taxes on thousands of dollars of income that they did not earn could seem devastating. Details include:

- Only applies to mortgage debt forgiven between January 1, 2007, and January 1, 2010.
- Only applies to the mortgage used to buy the home.
- Only applies when the home loses value or the owner's financial condition qualifies.
- The home must be the principal residence, not a second home or rental property.

In addition, California has introduced Senate Bill 1055. If passed, this bill will amend the Revenue and Taxation Code to conform with specified provisions of the Federal Mortgage Debt Relief Act of 2007.