The following are the most commonly asked questions and answers about The Mortgage
Forgiveness Debt Relief Act and debt cancellation:
Qualified principal residence indebtedness: This
is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
discharged through bankruptcy are not considered taxable income.
If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent
when your total debts are more than the fair market value of your total assets.
farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three
years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is
generally not considered taxable income.
Non-recourse loans: A non-recourse
loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or
used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan
resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
When we help you sell your home at a loss and the remaining loan is forgiven,
this does constitute a cancellation of debt under the Act.