History

• "Forgiven debt" is debt that a creditor has canceled or discharged so that the debtor is no longer responsible for paying it. Creditors who take this discharged debt as a business loss are required to file a 1099-C statement against the debtor, and the IRS considers this forgiven debt to be taxable income. As a result, a debtor has to pay taxes on the forgiven debt.
  
  

Significance

• During the housing bubble of the mid-2000s, many people paid top dollar for homes that they were later unable to afford. After foreclosure, these homes often sold for a fraction of what their owners paid for them, leaving a significant balance. While lenders may have discharged these debts, the former owners were faced with a hefty tax bill on the forgiven mortgage balance.
  
  

Benefits

• Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers whose primary residences were foreclosed can seek relief from taxes on forgiven mortgage debt, providing that they meet the criteria set by the IRS.
  
  

Exclusions

• According to the IRS, the Mortgage Forgiveness Debt Relief Act of 2007 is not intended to provide relief for properties other than a primary residence. Forgiven debt from the foreclosure of second homes, vacation homes, commercial property and income property are excluded from the relief offered by the act.
  
  

Maximum Debt Relief

• The amount of debt that is covered under the Mortgage Forgiveness Debt Relief Act is $2,000,000. If a married couple is filing their taxes separately, $1,000,000. The IRS can count any forgiven debt over these amounts as taxable income.
  
  

Timeframe

• When the Mortgage Forgiveness Debt Relief Act was passed in 2007, it only covered mortgage debts that were discharged through 2009. However, the Emergency Economic Stabilization Act of 2008 extended the provisions of the bill through 2012.