Mortgage Debt Relief Act of 2007

I have been getting a lot of questions from clients/friends about being upside down in their houses and what they can do about it. I always suggest that they speak to an Accountant/Attorney (and I suggest you do as well), but I will attempt to give you some basic information about the Mortgage Debt Relief Act of 2007. The IRS rules are a little confusing (like most information they put out) and in my opinion they need to simplify their pronouncements so the average taxpayer can understand them.

The act allows people to exclude debt forgiven under a mortgage restructuring and or foreclosure on a PRIMARY RESIDENCE. This means that you don’t have to include such debt as income when you are doing your tax calculations. There are several rules to the act and the more important ones are as follows:

1. The debt has to have been restructured (or the property foreclosed on) between 2007 and 2012.

2. A maximum of two million dollars may be forgiven (for those filing jointly) and one million dollars for individuals.

3. The exclusion can only be accepted due to a drop in home value or a deterioration of the taxpayers financial situation. Filing bankruptcy to wipe out debt on your primary residence is also an acceptable reason.

4. The original loan must be a NON-RECOURSE loan. A non recourse loan means the lenders only (final) action in the event of your default is to take back the house.

5. The debt most have been used to build, buy, or improve your primary residence. Home equity lines of credit (HELOCS) that were used (and later forgiven) to pay of other unsecured debt (credit cards,cars, living expenses, etc.) may not be excluded as income.

The IRS website ( has a publication (No. 4681) that goes into more detail about the subject.

My name is Greg Hoffman and I have lived in Las Vegas since 1990. I have been a Realtor here sine 1999.