Mortgage Debt Relief Act- Do You Qualify? Find out if this applies to you.

What is the Mortgage Debt Relief Act?

The Mortgage Debt Relief Act generally allows taxpayers to exclude income from the discharge of 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.

Yes, the IRS makes it sound pretty boring and perhaps even a bit unclear. Basically, the MDRA is a program that has been put in place to allow homeowners who have had to short sell their property to exclude the difference between the dollar amount their home was sold for vs. what their loan was worth. So for example, you short sold your home for $250,000, but your bank loan balance was $400,000 at the time you short sold your home, you would not have to include the difference as an asset or income on your tax return.

BUT…There are a few exceptions and limitations:

Up to $2 million may be excluded ($1 million if married filing separately.

Also, the loan must qualify as a purchase money loan, also known as “qualified principal residence indebtedness”. This means that the money from the loan was used to purchase or refinance the residence itself. Some refinance loans where money was taken out of equity to be used for items or services OTHER than home repair or upgrades may not qualify. Home Equity Lines of Credit (HELOC), and refinance loans where the money taken out was used for vacations or personal purchases may not qualify. However, we have been successful in getting the banks to allow these in certain cases. Contact us if you have questions about purchase money loans.

It is always best to check with your accountant or tax professional prior to making any final decisions or acting upon any information involving taxable (or non-taxable) income. You can also contact us with your questions and we’ll help guide you in the right direction.

So what does this mean to you?

It means that, in most cases, if you are upside down on your loan you may qualify for under the Mortgage Debt Relief Act to avoid paying taxes on the outstanding loan amount of your property if you are in a situation where you must short sell your home to avoid foreclosure.

If you (or someone you know) is upside down on their mortgage and are facing foreclosure, give us a call at 661-290-3802, or go to to learn how we can help save your home from the bank.