The Mortgage Forgiveness Debt Relief Act of 2007 (“the Act”) has been extended until January 1, 2014. The Act exempts most homeowners from paying federal income tax on debt forgiven by lenders through foreclosure, short sale or loan modification.
The Act was set to expire on January 1, 2013. The extension of the Act is expected to impact the market for short sales. If the Act had not extended, then a seller would pay income tax on the amount of debt forgiven by a lender in a short sale. As a result, many homeowners may have been reluctant to attempt to do a short sale and pay a significant tax on the forgiven debt had the Act not been extended.