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Mortgage Forgiveness Debt Relief Act of 2007

If the Mortgage Forgiveness Act of 2007 does not get extended by Congress by the end of the year, homeowners will have to start paying income taxes on the portion of their mortgage that is forgiven in a foreclosure, short sale or principal reduction.
That means if someone owes $150,000 on their home and it sells for $100,000 in a foreclosure auction, they could owe taxes on the remaining $50,000. For someone in the 25% tax bracket, that would mean paying $12,500 in taxes on the foreclosure. Similar taxes would for amounts that were forgiven in short sales and principal reductions.

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