The passage of this Act will go a long way in aiding financially strapped homeowners in the foreclosure process. Under pre-existing law, the debt forgiven by a lender in a foreclosure or Short Sale usually resulted in the borrower receiving a 1099 income tax form for the amount not recovered.

This debt forgiveness had to be reported as taxable income to the borrower. With the passage of H.R.3648, the Mortgage Forgiveness Debt Relief Act, a taxpayer is no longer required to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence. President Bush signed the Debt Relief Act on December 20, 2007 which amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence.

The Act limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Sets forth rules for determining the allowable amount of the exclusion for taxpayers with nonqualifying indebtedness and taxpayers who are insolvent. Seek the advice of your accountant for clarification.

With the recent increase of FHA loan limits from $362,790 to more than double to $729,750 many homeowners can refinance with much lower, more secure, fixed rate mortgages, especially the hard hit homeowners in California where housing prices exceed $500,000.

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