Mortgage Debt Forgiveness Relief Act (MDFRA) Expired on Dec 31, 2013
MDFRA, a 2007 law that prevents forgiven mortgage debt from being taxed as income. Starting January 1 2014, any mortgage debt forgiven is eligible to be taxed, creating potentially burdensome liabilities for the millions of Americans in stages of mortgage delinquency as they seek relief to prevent foreclosure.
Essentially the MDFRA allowed home owners to avoid paying taxes on the debt that is cancelled or reduced due to foreclosure, short-sales or loan modification.
Here’s an example to make this more clear:
A home owner is forced to sell his/her home due to loss of income. The home sells for less than what is owed on the mortgage(s), this is called a short sale. So the mortgage balance is say $200,000 and the lender approves a sales price of $150,000 . The $50,000 difference is considered taxable income; so if this homeowner is in the 30% tax bracket he/she would owe an additional $15,000 to the IRS.
In 2007 the Mortgage Debt Forgiveness Relief Act made that debt tax-exempt and now on 12/31/2013 that Act has expired.
There may be hope for distressed homeowners on the horizon…On Jan 13, 2014, Representative Bill Harris of Illinois introduced bill H.R. 3856 to extend the MDFRA for 2 more years. It was referred to the House Committee on Ways and Means. If the bill passes it will be retroactive to Jan 1, 2014.