Mortgage Forgiveness Debt Relief Act.

The Mortgage Forgiveness Debt Relief Act. is probably going to exclude the Mortgage Debt under a new Tax Law. Several type of mortgages can be excluded from Taxes according to this Law. This Act. is very important for those people who have lost or sold their houses or restricted their mortgage.

In the Tax Code, there are two types of Mortgage Debt.

1. Acquisition Debt. 2. Equity Debt.

There are some differences which might be excluded from it. The proceeds of Acquisition Debt were used in building, purchasing or substantially improving a principal residence.

The Mortgage Forgiveness Debt Relief Act. may exclude the Acquisition Debt but the Home Equity Debt can not be excluded under this Law. Rather there are some chances that the home Equity Debt might qualify under the bankruptcy or insolvency exclusion.

Well there is an another criteria for the debtors. A debtor must have been used his house as his main home. It means that if any body has a vacation house, a second house, a rental house or investment properties, will not be qualified this exclusion. But if any canceled debt property is there, then it might be qualified under the bankruptcy exclusion.

Now the question is how much debt can be tax free. Up to $ 20,00,000 debt amount can be excluded from the income of the years between 2007 to 2012.

So at the practical level it means that a taxpayer needs to show how his loan proceeds were used. And this is to separate the Acquisition and the Equity debt from each other.