A:Sometime in December of 2007, the President signed the Mortgage Debt Relief Act in an attempt to address this concern. Generally, the Act states that if a bank does choose to forgive you of a deficiency balance on your home, then the forgiveness of that deficiency will not be considered income to you. Unfortunately, this general rule is filled with many exceptions and exclusions. Among those exclusions are:
1. The home involved has to be your principal residence. If it is a rental property, the Mortgage Debt Relief Act gives you no relief.
2. You must have lived the house for at least two years.
3. The debt involved cannot exceed your basis in the home. For example, you paid $250,000.00 for a home in 2001. In 2005 when the market was strong, you refinanced your home and pulled our $100,000.00 of equity and put it into another house or investment or spent it. Now, you owe $350,000 on a home that you only paid $250,000 for. Even if the bank chooses to forgive your debt and you lived in the home for two years, you may still be subject to taxation on that other $100.000.00 of forgiven debt that represented the money you took out of the home.