How Does Cancelled Mortgage Debt Affect You?

Many owners of northern Virginia real estate have felt the impact of foreclosures and short sales in their neighborhoods.  If you have been affected with a foreclosure or short sale, have you taken advantage of the Mortgage Forgiveness Relief Act of 2007?

Congress passed this law to avert undue financial hardship on homeowners who found themselves in a foreclosure or short sale situation, and then faced with additional income taxes on the forgiven amount. The lender provides the homeowner a 1099C form showing their forgiven mortgage amount as income, and the homeowner must file a Form 982 with their tax return.

The law allows forgiveness from paying taxes on this income if the property is the owner’s primary residence, and only debt used to build, purchase or improve this residence will be forgiven. Any additional refinancing amounts not used for improvements on the property will still be taxable.

If you are considering or in the process of a short sale, be aware that this law and its tax benefits will expire on December 31, 2012. To ensure that their forgiven debt is not taxable, homeowners need to complete the sale process by the end of the year. It is best to consult with a tax professional to find out how the law will affect your individual situation and your northern Virginia real estate property.

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