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