The Mortgage Forgiveness Debt Relief Act of 2007 expired on December 31, 2013. But because Congress is still considering a bill that would extend the Act through 2014, there’s no need to worry yet if you think you might have mortgage debt forgiven in 2014.
What Is the Mortgage Forgiveness Debt Relief Act?
If a creditor (such as your mortgage lender) forgives some or all of your debt, the IRS treats the forgiven debt as income. This means that you normally have to pay income taxes on forgiven debt. (There are some exceptions to the rule that you must pay taxes on forgiven debt.)
This could be bad news if you are a homeowner who recently had mortgage debt forgiven, perhaps after a foreclosure or short sale, or as part of a loan modification. Luckily, about seven years ago Congress came to the rescue and passed the Mortgage Forgiveness Debt Relief Act of 2007. Under the Act, homeowners with certain types of forgiven mortgage debt don’t have to pay income tax on the forgiven amount. (Not all forgiven mortgage debt qualifies for this tax break. For details, see Nolo’s article Canceled Mortgage Debt: What Happens at Tax Time?)
The Act originally applied to mortgage debt forgiven between 2007 and 2009, but it has been extended several times. The most recent extension, however, expired on December 31, 2013.
Will the Act Be Extended Again?
A current bill in Congress, the Tax Extenders Act of 2013 (S. 1859), sponsored by Senator Harry Reid, would extend the Act through 2014. While not much seems to get done in Congress these days, some experts think that passage of the Mortgage Forgiveness Debt Relief Act likely. We’ll keep tabs on the issue and report back on the bill’s progress.