"When the country runs out of money", legendary comedian W.C. Fields once told a reporter, "then we'll just have to print some more". If things were really that simple, tax season would become a greater celebration than Christmas, Halloween and The Super Bowl all wrapped into one. The current financial state of the US, however, looks pretty grim for all tax payers, and particularly homes and owners who have been fighting the blunt of it these past few years. The very last thing needed when crumbling under constantly-heavier monthly payments is to be taxed if forced out of a home that can't be paid for any longer; which is where the recent Mortgage Forgiveness Debt Relief Act comes into play.

What the Act is exactly

The 1986 Internal Revenue Code was forged in a way that did not much favor home owners trying to steer clear of impending foreclosure, in that the IRS would add "discharges of Indebtedness" to the owner's gross income. The new bill, signed by congress on December 14th 2007 and by the President six days later, rectifies this supplemental burden by offering a three-year window in which such amounts are excluded from declared revenues.

In other words, if your family is trying to get out of debt without loosing everything, the government will not add insult to injury by taxing whatever amount you managed to strike from your overall debt.

In layman's terms

When faced with foreclosure and/or forced to sell a home because of an inability to pay, the home-value from the sale will sometimes be less than what was initially paid; if you agree to pay 100$ for an item that you cannot sell back for more than 70$, you still owe 30$. Since banks and their managers appreciate money, they usually consider taking a little less to be better than loosing a lot; many of them will agree to let you sell at the decreased-value price and "forgive" the difference. In the eyes of the IRS though, that forgiven amount constitutes an income for the seller, and thus taxed as thought it were acquired money. That does not sound so bad on a 30$ difference, but then again very few home loans are brokered for only a hundred dollars; perspective changes when the home is paid north of 100,000$.

The Act of 2007 allows home owners to accept the bank's generosity without the Internal Revenue Service looming behind, leaving a little bit of breathing space to re-build personal finances. Debts having been forgiven between January 1st 2007 and January 1st 2010 will not be subjected to taxation; the "overlooked" amount can go as high as two millions dollars, the IRS won't ask for their cut.

What it means for everyone

The ensuing effect will help home owners negotiate the sale of their property even at a loss without having to resort inevitably to foreclosure; banks are after all in the money business, not the reselling of homes business. If there is a way for them to negotiate even at a slight loss and avoid the overlong process or ceasing your assets, they will go the distance to meet you half-way through. Therefore, you not only have a chance to avoid bankruptcy, you also may be able to break even from the whole ordeal, and avoid a few years of credit purgatory.

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