The Mortgage Forgiveness Debt Relief Act of 2007 (2007 Mortgage Act) includes a provision that temporarily excludes income from the forgiveness of debt on a principal residence. This relief is retroactive to debts discharged after January 1, 2007 and before January 1, 2010. This provision creates a three-year exception to the current law so that homeowners caught in the current subprime mortgage crisis do not have to pay taxes for debt forgiveness on their troubled home loans. Under current law, the amount of the forgiveness of debt on a principal residence that is included in income is equal to the difference between the amount of the debt being cancelled and the amount used to satisfy the debt. These rules generally apply to foreclosure or the exchange of an old obligation for a new obligation. For example, assume a taxpayer who is not bankrupt or insolvent owns a principal residence subject to a $200,000 mortgage. If the creditor forecloses and the home is sold for $180,000 in satisfaction of the debt, the taxpayer has $20,000 of income from the discharge of indebtedness. Likewise, if the creditor restructures the loan and reduces the principal balance amount to $180,000, the taxpayer would also have $20,000 of income from the discharge of indebtedness. The tax on this income would have created an additional burden to taxpayers already struggling financially. The 2007 Mortgage Act provides relief from this burden so that taxpayers can recover faster. If you have any questions regarding this provision or if you have concerns regarding a home foreclosure, we can answer any questions and discuss your options in greater detail. Please call our office at your earliest convenience to arrange an appointment.