The Mortgage Forgiveness Debt Relief Act of 2007 temporarily suspended income tax on forgiven debt or refinancing of primary residences up to $2 million, to ease the burden on those struggling with debt due to the financial crisis. It only covers certain types of debt and was extended through 2012.
The Mortgage Forgiveness Debt Relief Act is a 2007 law passed by the United States Congress at the behest of President George W. Bush. The law allowed for a temporary change to tax laws regarding a forgiven debt or refinancing a home. Under previous statutes, taxpayers who had debts forgiven through bankruptcy or refinancing had to pay income taxes on the forgiven amount. With the approval of the law, this type of tax was temporarily suspended in many cases.
The reasoning behind the Mortgage Forgiveness Debt Relief Act of 2007 is relatively simple. In general, people who declare bankruptcy or decide to refinance a primary residence do so as a reaction to financial stress or crisis. In 2007, with the housing market collapsing across the United States, many homeowners and borrowers were forced into foreclosure, bankruptcy, and refinancing as a result of rising interest rates and declining employment. In order to reduce the additional tax burden on people who are already struggling to pay off debt, the law ended the income tax that applies to some types of forgiven debt.
This law covers only certain types of canceled or modified debt. In general, the debt in question must come from loans used to purchase, improve, or refinance a primary residence. Debt relief does not extend to rental properties, or properties used as secondary or vacation homes. Credit card, student loan, and auto loan debt canceled by bankruptcy or refinancing may or may not qualify, depending on the specific type of loan and forgiveness program used.
In addition to limitations on the type of debt covered by the law, the Mortgage Forgiveness Debt Relief Act also has a maximum amount that can be excluded from income tax. Refinancing or forgiven debt of up to $2 million United States Dollars (USD) may qualify for the exclusion, but amounts in excess of this number may be taxed as usual. For married individuals filing separate tax returns, a reduced maximum of $1 million applies.
The law originally extended the tax exclusions through 2009. In 2008, as the financial crisis began to take a full grip on the US and global economies, Congress decided to extend the law’s protections for a longer period of time. The Emergency Economic Stabilization Act of 2008 included a variety of new provisions to help bring stability to the US market, as well as extending the Mortgage Forgiveness Debt Relief Act through 2012.
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