This law impacts owner occupied home sales on or after January 1, 2007 through December 31, 2009. The technical legal aspects of this law mist be left to qualified legal and tax professionals. However, for homeowners the basic economic aspects of this law is summarized below.

1. If a homeowner is upside down on Qualified Residential Indebtedness, and the lender forgives a portion of the debt via a foreclosure, a deed in lieu of foreclosure, a short sale, or a workout package, the homeowner will not be required to pay income taxes on the forgiven debt up to $2 million.

2. Qualified Residential Indebtednessmeans a loan secured by an owner occupied home and used to either purchase, construct, or substantially improve said home is considered Qualified Residential Indebtedness.

3. What about a refinance loan? Can it be considered Qualified Residential Indebtedness? Yes, but only to the extent that the refinance loan does not exceed the balance of the loan being refinanced. Thus, when a lender forgives any homeowner refinance bebt that is above the balance of the loan used to purchase, construct, or add capital improvements, said refinanced bebt will be considered taxable income when a foreclosure, deed in lieu of foreclosure, short sale, or workout package is negotiated. In other words, if a homeowner did a cash pull refinance or equity line of credit loan and did not put all of said funds back into substantial home improvements there may be a tax problem when a portion of the refinanced debt is forgiven.

4. Finally, the MFDRA requies that any debt forgiven be subtracted from the homeowner's cost to measure gain or loss upon resale. However, this should not be a problem for most upside down homeowners because most foreclosures and short sales result in a loss not a gain and if a gain does occur the homeowner is still allowed to use the $250,000 and $500,000 exclusion rule.