The Mortgage Debt Forgiveness Act of 2007 allows an income tax exemption for a homeowner whose mortgage debt is partly or entirely forgiven by a bank. It’s set to expire Dec. 31, 2012.
To take advantage of the Debt Relief Act, you need to fall under very specific guidelines outlined by the IRS. For example, the debt forgiven is only for primary residences and the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
The expiration of the Debt Forgiveness Act will have an impact on short sales in that homeowners could try to push the short sale through this year to take advantage of the tax break.