H.R. 3648: The Mortgage Forgiveness Debt Relief Act

What once was once a bill, has been signed into Law. H.R. 3648

This happened almost a month ago but I just received a disturbing call from a homeowner who didn't understand what it was and who it was for. She was going to walk away from her Rental.

First of all the Law is not between you and your Lender. It is between you and the IRS. Your Lender still does not have to forgive your debt.

In the case of a completed Short Sale, the Lender has the option of sending you (the seller) a 1099 for income for the amount of your shortage. On your 1040 you would have had to state that as income and pay taxes accordingly on that reported income. This new law addresses how and if that 1099 will show and if any taxes are due on that income.

The Lender may still send you a 1099 - under the new law you might not have to pay taxes on it. Does that make sense?

Another option your Lender has available is to file for a Deficiency Judgement. this is a court proceeding in which the Lender is going after you to collect the money due. We'll talk about that later.

The most important thing to know is who and what the new law excludes.

• Is the loan on your Primary Residence? The Law excludes investment property.
• Is the loan a Purchase Money Loan? Did you buy the property with this loan? Refinances are not allowed.
• a HELOC or Home Equity Line of Credit doesn't count unless you can prove that the money used went directly to improvements on the house.
• If you passed the first three items you'll also need to remember it does not change your state tax obligations.

If you feel you are one of those that the law might pertain to I urge you to consult with a tax professional. It's not the time to do your own taxes!

Read the FAQ on the IRS Website.