Bush takes tax bite out of “short sales.”

President Bush has signed the Mortgage Forgiveness Debt Relief Act into law. The measure will waive taxes for homeowners who get any debt forgiveness as part of a workout or foreclosure proceeding.

There are two ways this can help. Before this law was passed, if a homeowner renegotiated their mortgage to a lower balance, getting part of it forgiven, the amount forgiven would be viewed by the IRS as income and subject to the income tax. This can screw up the whole deal.

The same thing could happen if a homeowner walked away from their house and the bank sold it off for less than the mortgage balance. If the bank agreed not to pursue the balance, this is called a “short sale” and once again the amount not pursued is seen as income.

Now all that has changed. If any part of a mortgage balance is forgiven, the homeowner will not have to declare that amount as income on their tax returns.

Comments are closed.