The Mortgage Debt Relief Act of 2007 is an Act written to provide protection for some Columbia Homeowners regarding the tax liabilities from the 1099-C received when a lender forgives their debt. Meaning, when a lender waives deficiency, that amount is “Forgiven” debt, and a 1099-C is issued.

According to IRS tax rules, this forgiven debt is to be considered as “income,” and therefore subject to be taxed. While this seems unfair to the seller, since this is not actually income received, it is, nonetheless, law. The Act protected those Columbia Homeowners who are selling  primary residences, and usually applies only to first liens, credit lines used for purchase money or home improvement.

In many cases, this was a major decision point for a Columbia Homeowner's consideration of how to address their selling situation, and one that made a short sale attractive over a Deed in Lieu or a foreclosure.

The Mortgage Debt Relief Act of 2007 is set to expire on December 31, 2012. As of today, there is no replacement or extension in place. Some Columbia homeowners may be concerned about the future of short sales, and question whether a Short sale is still the best decision for them.

Well I say yes. The main reason is that now about 40% of short sales do not qualify for the protection of the Act , and yet; many Columbia Homeowners still feel that the benefits outweigh the risks. and, with new (Fannie/Freddie/HUD) guidelines making full deficiency waivers more of a certainty than in the past. It is extremely rare that Columbia Homeowners not protected by the Act actually owe a tax liability.

With the Act in force, only primary residences are covered. This means that a large percentage of sales are not covered. There are certainly many Columbia Homeowners who are liquidating investment properties and second homes. The benefits afforded to these Columbia Homeowners are:

• The chance for a full deficiency waiver
• Avoidance of a foreclosure on credit

Deficiency is the difference between what the Homeowner owes and what the lender nets on sale. This difference will be reflected on the 1099-C issued by the lender and is the amount that may be considered forgiven debt, and therefore, income, based on current IRS Tax rules, or now the Tax Liability. This is what is also currently covered in some cases under the Mortgage Debt relief Act.

Columbia Homeoners, Deficiency is what you owe the bank, and Tax liability is what you owe the IRS.