I have attempted to write a blog about this for a long time....for one thing, it is a long and difficult subject. It is also frequently misinterpreted and misunderstood. The MFDRA of 2007 was signed into law by President Bush (for whatever reason many seem to want to give credit to Obama for this...but it was 2007)!!! It was a response to the rapidly rising foreclosure crisis that was perceived to be the result of subprime loans.
One interesting provision of the Act is that it does NOT exlcude from forgiveness of debt consideration HELOC or equity loans unless they were provably used to improve or repair the home.
Another misunderstood and misinterpreted feature of the Act is that applies ONLY to primary residences. Too frequently, I have worked with distressed home owners and their tax professionals and heard a comment about "not worrying" about the tax ramifications of a short sale etc when it was an investment property. There may be other relief in the tax code for owners of onbvestment property, but not under MDFRA.
Another significant aspect of the MFDRA is that many believed that it was limited to dissolution of real estate on or before 12/31/2009. President Bush extended the Act until 12/31/2012 prior to the 2008 elections.
I also believe that home owners should be diligent in rcognizing that the bank is not going to sell the property for FMV. There is a strong argument that your tax should be lower since the FMV of the property was higher than what the bank accepted and hence, your forgiveness is lower and less tax therefore. I recommend getting a BPO or apprisal close to the date of dissolution. It is difficult mto get an accurtate one after the fact.
There is no question that the Act provides relief for many and I will write more on this subject in future blogs...