Home owners who need mortgage debt relief are not the only ones who will benefit from the recent passage of tax relief for homeowners undergoing foreclosure. The Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) has finally been passed by both chambers of Congress as of December 14, 2007 and has been signed into law by the President. This long awaited bill provides much needed debt relief to thousands of home owners who unfortunately have been caught up in the catch-22 of the sub-prime loan fiasco and are losing their homes through the foreclosure process. Once the adjustable rate loans on those homes "adjust up" the home owner almost always cannot afford the higher payments and the foreclosure tidal wave sweeps them from their homes.

Even worse, if the home owner made arrangements to sell the house for less than the actual mortgage, through what is commonly known as a short sale, the IRS came swooping in and claimed the difference between the actual sale price and the mortgage owed on the property as "earned income". Not only do they lose their home through foreclosure, they also incur an additional tax bill. Talk about a raw deal.

For example. If Joe and Jane Smith owned their home with an adjustable rate mortgage note of $500,000 and was paying at a low adjustable interest rate of 3% per year their payments would be approximately $1,250 per month. But after a two to three year period the interest rate adjusts to 5.75% on the same amount of $500,000. The payment adjusts to approximately $2,396 per month. Joe and Jane's budget will only allow for payments of $1700 per month maximum. They are in trouble. To add insult to injury the real estate market is spiraling down and property values have taken a nose dive, including Joe and Jane's home. The property's value is now $400,000. Joe and Jane's property value is now upside down. They can't afford to pay the mortgage on the property and they can't sell it even for the amount they owe on it. A "catch-22".

They don't pay the mortgage and the bank forecloses. Joe and Jane in the meantime find a buyer who will purchase the home for $375,000. The bank agrees to sell to the prospective buyer, thus releasing Joe and Jane from the responsibility of the $500,000 mortgage, a difference of $125,000. This is forgiveness of debt. To the IRS it's called income. Under the IRS code the IRS could and in many cases has sought to tax the home owner for the debt forgiveness amount. In this case Joe and Jane, as if not already in enough financial trouble, would owe taxes on the $125,000 too. That is until the recent passage of the Mortgage Forgiveness Debt Relief Act of 2007.

This Act amends the Internal Revenue Code to exclude from gross income amounts attributed to a discharge of indebtedness incurred to acquire a principle residence (the one the home owner lives in). The amount of debt forgiveness can be up to $2 Million. This is great relief for all of the Joe and Jane's of the adjustable rate world who just can't keep their homes because the payments are too high and in many instances the property value has also decrease significantly.

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