Mortgage Forgiveness Act

If you borrow money from a financial institution and that financial institution forgives some amount to you, it will be added to your taxable income under the mortgage forgiveness act 2007. For example, you borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

It is important to mention here that not all the forgiveness and cancellations are taxable under the mortgage forgiveness act. Forgiven incomes are taxable with few exceptions under mortgage forgiveness act. These exceptions are given below;

1. Debts discharged through bankruptcy are not considered taxable income.
2. If you are insolvent when the debt is cancelled, it is not considered taxable income.
3. If your mortgaged property is sold in foreclosure, the cancellation of payments will not be considered taxable income. Remember that if you sell your home your self and your lender forgives your remaining balance, this remaining forgiven balance will be added in your taxable income.
4. In some cases, the non business credit card loan cancellation can be excluded from taxable income.
5. Your student loan cancellation will not result in taxable income if you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation. But your student loan must have been made by;

• Federal government, state government or local government
• A tax-exempt public benefit corporation
• A school which has a program to encourage students to work in undeserved occupations

It is clearly mentioned in the mortgage forgiveness act that no gain the sale of mortgaged property will be included in taxable income. Similarly you cannot claim any loss incurred in sale of mortgaged property in your income tax return.

As you know the global economy is facing depression, as a result more and more United States of America citizens are facing foreclosure. In this situation if you are forgiven any amount from the lender, government comes to take tax from you under mortgage forgiveness act. Government of United States of America should make policies for the benefit of general public and revise the clause of inclusion forgiven amount in tax return.

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