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Cancellation of debt expiration
The Mortgage Forgiveness Debt Relief Act of 2007 allows a homeowner under certain conditions to exclude income as a result of a modification of the terms of a home mortgage loan, including a short sale, or a foreclosure of the homeowner’s principal residence. The exclusion of a debt amount is also known as “Forgiveness or Cancellation of Debt.” 

Before the Act, in transactions where there was a cancellation of debt, the borrower had to report the amount that the lender cancelled after the short sale or foreclosure as income on the income tax return because there was no obligation to repay the lender. The amount of the income was determined when the lender filed IRS Form 1099-C, Cancellation of Debt. For example, a homebuyer borrowed $200,000 to purchase a house to be used as a primary residence, and the total amount owed at the time of the foreclosure was $150,000. If the lender later filed a 1099-C form with an amount forgiven of $50,000, then this amount would have to be added by the taxpayer as income.

In Oregon, if a lender forecloses a first lien securing repayment of a mortgage loan, either judicially or nonjudicially, on a primary residence, the borrower is not financially responsible for the difference between the amount owed and the amount paid for the property at the foreclosure sale. Also, Oregon law prohibits lenders from bringing an action or otherwise seeking repayment for the deficiency balance following a short sale if the lender files a Form 1099-C with the IRS. 

More information about the federal Mortgage Forgiveness Debt Relief Act and other related information is available at the IRS website. In the meantime, currently available information can be found at:

http://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation, and IRS publication #4681 http://www.irs.gov/pub/irs-pdf/p4681.pdf.

Information about Oregon law prohibiting collection actions after a short sale can be found at: http://www.leg.state.or.us/11reg/measpdf/hb2900.dir/hb2916.en.pdf;
http://www.leg.state.or.us/ors/086.html; (ORS 86.705 to 86.795);
or http://www.leg.state.or.us/ors/088.html; (ORS Chapter 88).