Mortgage forgiveness tax treatment gets onemore year
From the Columbus Board of Realtors:
As partof the fiscal cliff deal, Congress extended the cancellation of mortgage debtrelief provision for one year, throughthe end of 2013. President Obama is expected to sign the legislation into lawshortly.
The law– which was set to expire at the end of 2012 - is crucial to foreclosuremitigation efforts such as principal forgivenessand short sales. Normally, U.S. law decrees that when a lender forgives all ora portion of a borrower’s debt,the forgiven amount is considered taxable income for the borrower. This isknown as Cancellation of Debt (COD)Income and must be included in a taxpayer’s gross income.
ThisAct, however, created an exception to this rule under the U.S. Tax Code. TheMortgage Forgiveness Debt ReliefAct allows homeowners who received principal reductions or other forms of debtforgiveness to not pay taxes on theamount forgiven. The amount extends up to $2 million of debt forgiven on thehomeowner’s principal residence.
For homeowner’sto qualify, their debt must have been used to “buy, build, or substantiallyimprove” their principal residenceand be secured by that residence. The law, which was passed in 2007 witha five year sunset provision, will nowbe in effect until January 1, 2014.
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