In this week's episode of the Yesner Law Podcast, I discuss the Mortgage Debt Relief Act ("MDRA"). This law provides that forgiveness of debt income, or phantom income, related to the foreclosure or short sale of a primary residence is non-taxable if the loan deficit that is waived is related to a loan used to buy or make improvements to the house.
When you complete a short sale or lose a house to foreclosure, the bank may choose to waive the deficit - the difference between the amount owed on the loan and the value of the house. The IRS sees that as a benefit (a debt that is due but does not have to be repaid). The bank reports this by issuing IRS Form 1099-C. Many people misunderstand that the MDRA only excludes the income, the MDRA says nothing about the issuance of the Form 1099-C. What I explain to clients is that they need to file the form 1099-C with their return, AND file the proper forms to show the IRS the deficiency is excluded as income. Of course, the mechanics of how to do that fall within income tax guidelines and so we refer to a CPA or Tax Attorney at that point.
The MDRA is set to expire on December 31, 2016. It is our guess that the law might not be extended into 2017, but that may also be reliant upon the outcome of our upcoming presidential election. Stay posted to our website (www.yesnerlaw.com) or email me at Shawn@YesnerLaw.com for details on the MDRA as they develop.