The Mortgage ForgivenessDebt Relief Act (know as H.R. 3648) was introduced in Congress on September 25, 2007, and became law on December 20, 2007. This act offered relief to homeowners who would formerly owe taxes on forgiven mortgage debt after facing foreclosure. The act extends such relief for three years, applying todebts discharged in calendar year 2007 through 2009. (With theEmergency Economic Stabilization Act of 2008, this tax relief was extended another three years, covering debts discharged through calendar year 2012.)

Normally inUS law when a lender decides to forgive all or a portion of a borrower’s debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed.

However, The Mortgage Forgiveness Debt Relief Act of 2007 amends theInternal Revenue Code to exclude from gross income amounts attributable to a discharge of indebtedness incurred on a principal residence. H.R. 3648 would ensure that any amount forgiven on mortgage debt secured by a principal residence would not be taxed. This bill will apply whether it is a short sale, foreclosure, deed in lieu of foreclosure or any other similar arrangement that relieves the borrower of the obligation to pay some portion of their debt on their primary residence. The amount of forgiven mortgage debt allowed to be excluded from income tax is limited to $2 million per year.

NOTE: If you are considering a short sale for a property other than your primary residence you could be have potential tax liability. Every situation is different and you should contact an accountant or tax advisor before conducting a short sale, deed-in-lieu-of-foreclosure, or foreclosure to determine your potential liability.