Financial Implications

The Mortgage Debt Relief Act of 2007 and Debt Cancelation

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

Generally allows taxpayers to exclude income form the discharge of the debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to service performing for the Lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

If you borrow money from a commercial Lender and the Lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purpose, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the Lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the Lender. The Lender is usually required to report the amount of the canceled debt to you and the IRS on a form 1099-C, Cancellation of debt.
Here’s a very simplified 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.

(Source: http://www.irs.gov/individuals/article/0,,id=179414,00.html)

LENDER RECOURSE

Arizona’s Anti-Deficiency Statute (A.R.S. 33-814(G) )

if trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.

General Requirements:

• Single family or duplex
• 2 ½ acres or less
• Utilized as dwelling

Please note : Some Lenders may request the Seller to sign a Note as requirement of Short Sale approval. The seller should seek professional counsel prior to signing such a document.