Homeowners who sold their principal residences short or lost them to foreclosure have benefited from the Mortgage Forgiveness Debt Relief Act of 2007. But the law expires at the end of 2012, meaning that those households who experience a short sale, foreclosure, or deed in lieu could receive a tax bill the following year. Wisebread explains how it works:
Typically, the IRS considers forgiven debt up to $2 million as ordinary, taxable income. The lender issues a 1099-C to the borrower for the balance owed, minus what the home was sold for. While the lender will not pursue the borrower for the difference, the IRS may starting in 2013. President Obama’s FY2013 budget proposal includes an extension of the Act through the end of 2014, but only time will tell if it sticks.
The debt forgiveness act was passed in the House of Representatives on a 386-to-27 vote. The National Association of Realtors supported the original bill and plans to advocate for its extension on behalf of homeowners who face financial challenges, according to ProPublica.org. Proponents believe that it is unfair to expect homeowners to pay tax on forgiven debt when they cannot even afford to pay their mortgage without a significant modification. How do you weigh in on the issue?
For specific details on the Mortgage Forgiveness Debt Relief Act, refer to the IRS. Those homeowners with underwater mortgages should consult with experts in the field to determine the best course of action.